The Contrarian Case for Ocean Cargo
The conflict in the Persian Gulf is growing ever more complex...
The Strait of Hormuz is still closed. One-fifth of the world's oil supply once passed through this bottleneck... but with the war in Iran ongoing, it's too dangerous for tankers to traverse the channel.
Now, refining capacity in the region is shrinking as more Gulf States get drawn into the fray...
On Wednesday, Israel struck one of Iran's key oil production facilities in the South Pars gas field.
Then, hours after the South Pars strike, Iran retaliated with a strike on Ras Laffan, home to one of Qatar's major petroleum-refining operations.
These fresh escalations in the region are wreaking new havoc on global oil markets. The price of light crude oil has soared 46% since February 28, the start of the war in the region.
The Iran conflict injects uncertainty and complexity into global supply chains.
But investors have a counterintuitive opportunity amid all this chaos...
Despite what you'd expect, one group of businesses has a history of thriving in treacherous times. And that means we should pay attention to this part of the market as uncertainty soars...
Boom Times Could Be Ahead for Shippers
I'm talking about shipping companies.
When we pay for shipping, we're really buying two things: transport and expertise.
The "transport" part of the equation is obvious: We want our packages delivered from point A to point B. But "expertise" is harder to quantify...
To get a package to its destination, shippers must navigate international laws as well as physical distance. Both get more complex in times of conflict.
With this backdrop, shippers can charge more for their services. Profitability rises, and shareholders reap the rewards.
Broadly speaking, shippers thrive in uncertain political and economic backdrops. They're subject to volatility, of course, like any other business... But they also capture lots of upside as expertise becomes more valuable.
Complexity is soaring across the globe... but today's geopolitical environment is actually a tailwind for shippers.
Let's use Danish shipping company Maersk (AMKBY) as an example. This $39 billion giant has been in the ocean-shipping business for more than a century.
Maersk is considered a bellwether for global trade. And importantly, its stock has traded publicly since the 1980s – which means we can test it across a variety of market cycles.
We'll compare Maersk's performance against the U.S. Economic Policy Uncertainty ("EPU") Index, a long-running measure of policy uncertainty in America. (As you would expect, this index closely mirrors the global EPU Index... However, I chose to test the U.S. EPU Index because it's longer running.)
Using data going back to 1988, I separated economic policy uncertainty into five tiers. The first quintile represented periods of the lowest uncertainty... while the fifth represented periods where uncertainty was at its highest.
Then, I tested each tier against Maersk's forward returns. You can see how Maersk performed in each period below...
The data is clear... Maersk outperforms significantly when the U.S. economy is most uncertain.
As you can see, Maersk returns about 9% in a "minimal uncertainty" year. This return falls to 6% when uncertainty rises into the second quintile – showing that Maersk does get bogged down by low-level complexity.
But as uncertainty rises, so does Maersk's performance. In the third and fourth quintiles, Maersk returns roughly 8% and 10%, respectively.
And that return soars in the fifth quintile. When uncertainty is at its highest, Maersk returns 11% in an average six-month period... and 18% in the average year.
That almost doubles Maersk's performance when uncertainty is at a 4 out of 5. And it shows how shippers can profit when the world becomes unstable.
Right now, the U.S. economy is more uncertain than it was during the early disruptions of the COVID-19 pandemic. Take a look...
Uncertainty is at multiyear highs. And again, the data shows that this is a tailwind for global transporters.
With oil prices soaring, cargo companies will be exposed to the same volatility as any other company. But history tells us these businesses also capture asymmetrical upside during chaotic times.
The global economy looks more chaotic today than it has in years. But with that backdrop, shippers can absolutely soar. Consider adding cargo companies to your portfolio today.
Good investing,
Sean Michael Cummings
Further Reading
After the February 28 attack, Iran retaliated by shutting down the Strait of Hormuz. With 20% to 30% of the world's oil now under blockade, one asset class recently went on a rare hot streak. Put it all together, and all this upheaval could be a recipe for a continued rally.
"If you fight Wall Street, you'll go broke waiting to be right," Brett Eversole writes. If you ask Main Street, the economy isn't doing well. Meanwhile, the market is holding up better than expected. And recently, a rare signal showed we could see a double-digit stock rally in the coming months.
Market Notes
HIGHS AND LOWS
NEW HIGHS OF NOTE LAST WEEK
Chevron (CVX)... oil and gas
ExxonMobil (XOM)... oil and gas
ConocoPhillips (COP)... oil and gas
BP (BP)... oil and gas
EOG Resources (EOG)... oil and gas
Occidental Petroleum (OXY)... oil and gas
Phillips 66 (PSX)... oil and gas
Canadian Natural Resources (CNQ)... oil and gas
Cenovus Energy (CVE)... oil and gas
HF Sinclair (DINO)... oil and gas
Tower Semiconductor (TSEM)... semiconductors
Ciena (CIEN)... telecom equipment
Five Below (FIVE)... discount retail
MasTec (MTZ)... infrastructure and engineering
NEW LOWS OF NOTE LAST WEEK
Fidelity National Financial (FNF)... insurance
Adobe (ADBE)... cloud services
DoorDash (DASH)... food-delivery app
Conagra Brands (CAG)... packaged foods
Pilgrim's Pride (PPC)... poultry
Campbell's (CPB)... soup
McCormick (MKC)... spices
Builders FirstSource (BLDR)... homebuilder supplier
NVR (NVR)... homebuilder
Home Depot (HD)... home improvement
Mid-America Apartment Communities (MAA)... residential REIT