J Mintzmyer is an increasingly rare species – a shipping stock analyst, moreover he’s a guy who actually picks out the winners unlike most of his peers.
Mintzmyer works for US-based Value Investor’s Edge. For every theoretical $100,000 invested in the market, Mintzmyer and his team are outperforming the industry average by $9,000 to $23,000.
Shipping has seen seven high profile researcher departures over the past year, the majority of which seem to be involuntary, leaving Mintzmyer in a strong position.
“The shipping industry has been incredibly difficult for equity investors, but more importantly for the sell-side outfits, it has been disappointing for the investment banking type operations,” Mintzmyer says, explaining why banks have been axing coverage of shipping lately.
It’s worth remembering the industry has not seen a full fledged IPO since June 2015 and there have been very few publicly-offered debt deals for around two years.
What makes Value Investor’s Edge’s approach different from the mainstream analysts, according to Mintzmyer, is in two key areas.
First, analysts tend to crowd around and laud the sector ‘leaders’ for example Frontline in crude tankers or Scorpio Tankers in product tankers.
“While I don’t mind investing in a favourite, valuations are key, and so our picks are often the less popular, but far better valued, names like International Seaways or Diamond S in crude and product respectively,” Mintzmyer tells Maritime CEO.
A second key difference is the way Mintzmyer’s company builds fair value estimates. He does not set price targets like other analysts because he concedes he has no clue where the stock will trade in a week, a month, or even a year. However, Mintzmyer does have a decent idea of what a company’s assets and business model is intrinsically worth, both by utilising real-time asset values to determine net asset value and also by normalising EBITDA and figuring out a reasonable base value from that approach. Value Investor’s Edge then picks stocks with balance sheets that can survive downturns and management teams that won’t squander its money.
“If we can absolutely nail the fundamentals and the buying price, we’re fine with waiting,” says Mintzmyer.
“This might seem like a small nuance, but it makes a big difference in portfolio allocation mindset since we can be legitimate investors buying companies for good prices and avoiding the ones which are overpriced. Analysts tend to move their targets up when a company runs and they tend to find excuses to lower their targets when prices fall. We understand that prices are indicative of current sentiment and trading interests and we spend far more time focused on the fundamentals,” Mintzmyer explains.
The analyst says he is “extremely proud” of his company’s performance in shipping, and the stats certainly back him up here.
“This has been one of the most brutal segments to invest in the markets,” Mintzmyer says. Over the past five years the S&P 500 is up around 50% while the main shipping ETF (SEA) is down over 60%. In the past two years, the S&P is up about 20% while the SEA is down 30%.
Value Investor’s Edge launched in 2015 and has produced substantial gains, especially in its income model portfolios, in every year except for 2018. In 2018, it was slightly positive until early November, and then the end of last year was an “absolute rout in our markets,” Mintzmyer admits.
This year has been profitable. As of yesterday, the company’s two portfolios, ‘best risk/reward’ and ‘speculative plays’ are up 13% and 27% year-to-date versus the SEA ETF up only 4%. The Russell 2000 is up 11%.
“If you look at the performance track records of almost every shipping analyst out there, they’ve been blown out of the water year after year after year,” Mintzmyer points out. “It’s not solely their fault. These are smart guys, good people, but they are operating in a broken model.”
Mintzmyer attacks the old model based on price targets around current valuations and momentum, arguing too many analysts are often raising targets and getting excited on the way up when it’s time to take profits while conversely they’re often cutting targets and running away when it is the perfect time to invest. They also have a lot of different incentives, so it has been more difficult for many of Mintzmyer’s peers to make bearish sell/short calls or to set up pair trades the way he does to reduce risk.
Finally, and rather importantly, the bills are paid in a different fashion.
“I’m a buy-sider, which means that I am paid by investors to produce research,” Mintzmyer explains. “I also am paid based on my performance in the markets. If I do terribly over time, I’ll lose clients and even worse, I’ll lose myself money. At major banks, these analysts are all hard working folks who want to do great things, but their employer is primary focused on generating banking business. It’s just a broken model whose time has came and went.”
So with all this strong track record is now the time for investors to get more involved in shipping? Mintzmyer is emphatic at this point, arguing that we’re at an almost unparalleled time in modern history to make big profits from piling into certain shipping segments.
“Shipping stocks are near modern record low valuations while rates have been steadily improving and the forward supply/demand balance in some sectors is the strongest I’ve seen since the mid-2000s, perhaps even the strongest in modern history,” Mintzmyer says.
“To make enormous profits in shipping, one has to invest at crisis-level valuations and catch a forward dislocation in supply/demand balances,” he continues. “The vast majority of profits aren’t made from running a shipping business for decades, but rather from asset play.”
Although he prefers to build a portfolio instead of a single stock pick, when pressed by Maritime CEO, Mintzmyer’s favourite single stock position is Golar LNG while his favourite segment for the coming year is the LPG sector followed closely by crude tankers.
Splash readers can hear more from the lead researcher at Value Investor’s Edge by listening to last month’s inaugural episode of the Deep Dive, Splash’s new podcast here.