Macroeconomic conditions that had been working against Zim Integrated Shipping Services (ZIM 16.07%) flipped in the company's favor in January, making investors excited about the opportunity that lies up ahead. Shares of Zim gained 52% in the month, according to data provided by S&P Global Market Intelligence, as investors bet that pricing power was quickly returning to the industry.
A geopolitical twist after a tough year
Investors in the global shipping specialist can't be blamed for feeling a little seasick after the last few years. The pandemic caused an initial drop in demand and then a massive rebound, fueling a strong period for the companies that carry cargo around the world. But in 2023, the stocks gave most of those gains back as volumes declined amid rising global uncertainty.
For Zim, the sell-off was particularly difficult because investors became worried about whether the company would struggle to manage its debt as demand fell.
But geopolitical events have altered the outlook for Zim and other shippers. Attacks on Red Sea shipping lanes by groups based in Yemen are disrupting global trade and causing shippers to reroute transports. As a result, shipping rates are spiking higher.
Mid-month, Jefferies upgraded Zim shares to buy from hold and raised its price target to $20 from $14. The bank said it expects Zim to rapidly shift from a cash-burn situation to a "significant" cash-generation story thanks to the higher rates.
With diversions anticipated to continue for some time, Jefferies expects tight capacity and favorable market conditions for Zim for the foreseeable future.
Are Zim Integrated shares a buy after a strong January?
It's worth noting that even with the January surge, Zim shares are down 42% over the past year and 85% lower than where they traded as recently as 2022. That implies there is still the potential for significant upside from here, especially if Jefferies is correct and the Red Sea situation is not resolved anytime soon.
However, investors need to remain cautious. Zim is reliant on spot rates, not long-term contracts, meaning the stock is significantly exposed to headline risk. As we learned last month, headlines and geopolitics are hard to predict, and just because rates moved higher in January, there is no guarantee conditions will not shift again in the weeks to come.
Given their volatility, Zim shares are best suited for those hoping to make a short-term profit on global instability. For those with a longer-term focus, there are better stocks -- including shipping stocks -- to keep on your radar.
