What: Shares of Teekay Tankers (NYSE:TNK) sank 16% by 12:30 p.m. EST on Tuesday January 12, 2016. An analyst downgrade was the main weight pulling the stock downward.
So what: An analyst from JPMorgan downgraded Teekay Tankers from overweight all the way down to underweight as well as cutting its price target from $10 to $7. In doing so, the analyst cited the company's "high spot exposure and relative rich valuation." In addition to specifically calling out Teekay Tankers, the investment bank also lowered its tanker rate forecasts for 2017 through 2019, which weighed on competitors like Nordic American Tanker (NYSE:NAT).
Prior to today's plunge Teekay Tankers valuation, as measured by Enterprise Value-to-EBITDA, was a bit richer than a peer such as Nordic American Tanker:
That richness has now disappeared, but the other concern remains, which is Teekay Tankers' high exposure to the spot market. Unfortunately, the same can be said for Nordic American Tankers as well. That exposure is by design, with the business models of both companies built so that they can capture higher spot rates and therefore stronger cash flow in the good times by keeping to their fleet available. However, the downside during tougher times can be very steep.
Now what: Because of its focus on the spot market, Teekay Tankers' cash flow and its stock price can be quite volatile. Therefore, any hint that the market is turning over typically leads to concern from analysts and a wave of selling by investors. In other words, an investment in a tanker stock like Teekay Tankers isn't for the faint of heart.