By: Bill Spencer — April 26, 2021
Small-Cap Monday - Giant Hedge Funds Are Propelling this Shipping Stock
‘Big Bill’ Spencer here, and thanks for stopping by.
I began this week’s report after watching a few scenes of a horror movie I happen to enjoy.
It's the sequel to Steven Spielberg’s horror classic, Poltergeist.
Poltergeist II opens with the daughter (who was terrorized by malign forces in the first film) picking up a telephone, listening, then turning slowly to intone...
I have no poltergeists or other phantasmagorical goings on for you today.
But we do have a comeback story.
Most investors might not know it, but the 20-year cycle in maritime shipping and in shipping stocks is well underway.
During positive economic times like we're in now, shipping companies undergo huge demand.
That makes for one great investment opportunity, particularly in the small-cap (and even smaller) shipping segment.
One European container shipping company has already begun to profit from the current boom.
In fact, it’s beaten earnings estimates in each of its preceding four quarters.
Plus, this company expects its 2021 first quarter earnings will beat last year’s by more than 240%.
Historically, when earnings are revised, it’s likely that the stock sees an upturn.
In fact, just this past Friday, this tiny stock shot up more than 13%.
We’ll return to this potentially profitable maritime tale in a minute.
First, let’s see how the market did last week.
(Click on any image to enlarge)
Both large cap indices, the S&P 500 and the Dow Jones Industrial Average, were down this week.
The Dow was this week’s biggest loser, dropping 0.46%, while the S&P 500 gave back 0.13%.
The tech-heavy Nasdaq Composite lost 0.25%.
Small-caps, on the other hand, made modest advances.
The S&P 600 picked up +0.16% for the week, while the Russell 2000 was the biggest gainer, picking up +0.41%.
After outperforming the market handily from the fourth quarter of 2020 through much of the first quarter this year, small-caps have cooled off considerably.
So I wouldn’t read too much into this week’s bony gains. More likely their performance reflects the current indecision choppiness we’re seeing in the market.
The picture becomes clearer when we take a look at the "internal market," which focuses on sectors and sector breadth.
To get a handle on sector breadth, we turn to a special tool we've designed called the US Industry Bell Curve.
This indicator (which you get when you join our data platform, Sector Prophets Pro) shows us which sectors are under the control of the bears (the ones colored red)... and which are under the control of the bulls (those are colored blue).
The image below was generated after the market closed on Friday, April 23.
This week, the bulls controlled 19 of the 45 sectors; the bears controlled 26.
That’s quite a shift from last week, when the bulls controlled 71% of the sectors.
So we're seeing some weakening in breadth as bears take control of more sectors.
One sector that’s remained blue is International - Europe, one of the four international groups we track at True Market Insiders.
We see that right now International - Europe holds the #21 position in the Sector Relative Strength Matrix, another premium tool found on Sector Prophets Pro.
That means it’s performing better than 24 other sectors.
This group is where our European shipping company resides.
That company is Euroseas, Ltd (ESEA) which originated more than 140 years ago, by the Pittas family, of Athens, Greece.
The modern Euroseas Ltd. was formed in 2005, consolidating the Pittas family’s ship-owning interests. Today, the company boasts 14 container vessels.
Admittedly, container vessels aren’t the sexiest industry.
But that's OK -- we're here to profit not to be impressed by glamour.
Maritime transport is vital to the entire world’s economy.
Over 90% of our trade is carried by sea, and ocean-going vessels are still the most cost-effective means of transport goods and raw materials en masse.
Of course as you know, global trade plunged last year in the wake of Covid-19.
In turn, shipping firms moth-balled their vessels, and cancelled their sailings.
Then, as summer wore on, trade demand (driven by eCommerce) began to climb.
Westerners, forced to cancel travel and vacation plans, instead used their money to buy goods largely made in Asian countries.
Manufacturing in China and other Asian countries mushroomed.
Trouble was, thousands of shipping containers were literally stranded in European and American ports. Exporters were caught scrambling for a way to deliver those goods.
Not only were seagoing vessels and their containers unavailable...
But with so many airplanes grounded, the usual excess space on airliners was also unavailable.
The result was shipping congestion and massive delays.
Costs rose, and a huge spike in container shipping rates followed.
In fact, according to The Economist, since November the cost of a standard 40-foot container being shipped from Asia to Europe has nearly quadrupled. The cost has doubled from North America to Asia.
The world faces huge growth in global e-commerce, congested ports, shortages of shipping containers, and rocketing costs.
A rise in fuel costs will also boost shipping costs.
In fact, in the U.S. alone, gas prices rose 31% from December to March, driving inflation.
When inflationary pressures are at play, shipping stocks are becoming more attractive.
And for some, such as Euroseas, revenues are rising...
...as are earnings.
Further supporting the company’s anticipated growth, Euroseas recently announced that it had received a new charter for its Joanna vessel.
The terms are double what the ship had been earning.
It will secure a minimum of $9 million in revenue and contribute ~$3.2 million EBITDA.
ESEA’s Chairman and CEO, Mr. Aristides Pittas, told investors that the new charter “improves (the company’s) profitability and cash flow visibility.”
Insiders hold over 60% of the company (61.18%), which is generally viewed positively. Insiders who own stock are more apt to push for greater company performance, as they have the added incentive of an equity stake.
In the price chart above, the green horizontal line shows where the stock began to trade above $5. Notice the breakout. That's no accident.
Many institutions are prohibited from trading stocks under $5 or $10.
The black dotted line shows where ESEA broke above $10. Again, we see an advance.
That's because, at that higher level, more and more hedge funds can now take positions.
When COVID nearly killed off the shipping industry in Q1 2020, institutions unloaded ESEA (along with other shipping and tanker stocks).
You can see that reflected in the tall red rectangle at the left of the image above.
At the far right we see institutional buying for Q1 of this year.
That's quite a turn around.
Now, there are a few caveats here.
For one thing, with a market capitalization near $85 million,ESEA is a micro-cap stock. And while a stock like this can shoot up dramatically (especially if the giant hedge funds get behind it)...
It canals find it harder to raise capital, something that could become a headwind for ESEA.
For another thing, we're not completely out of the COVID woods yet. This is a European company operating in a global marketplace. Additional coronavirus outbreaks and shutdowns would take their toll, the same way they did last year.
Finally, this is a pretty thinly-traded stock. It trades on average around 100,000 share a day. If you're uncomfortable with that relative lack of liquidity, ESEA might not be for you.
But if you're a trader with a moderate appetite for speculation -- I think this stock will reward you handsomely.
Have a great week,
Editor-in-Chief, True Market Insiders