Friday, December 20, 2013

Why Soros Management Moved into Dry Bulk Shippers in Q3 2013 (DRYS; NM; DSX)

Although the Baltic Dry Index has been on a tear in 2013 I can't recall the last time we had a post on it or the shipping companies.As the Financial Times reported last week:

Shipping benchmark hits three-year high
A recovery in global shipping markets is gathering momentum with a key indicator hitting a fresh three-year high, raising hopes that the gloom hanging over the sector is finally lifting.
The Baltic Dry index, which reflects the daily charter rate for vessels carrying cargoes such as iron ore, coal and grain, rose 2.5 per cent to 2,237 points, the highest level it has reached since November 2010....MORE
...Capesize ships, the largest kind of dry bulk carrier that accounts for about 40 per cent of the tonnage afloat, are now earning more than $39,000 per day compared with an average daily charter rate of $7,400 last year.
In contrast, Capesize rates averaged $111,000 per day at their peak in 2008....
From Market Realist:

George Soros
George Soros, like Warren Buffett, is one of the most admired investors in the world. His Quantum Fund’s 32% annualized return is admired by many investment professionals, analysts, students, and investors. But note that Soros’s investment strategy differs quite a bit from Buffett’s.
While Warren Buffett has put up a strong track record by buying valuable companies and holding them over long periods, Soros made his fortune by betting large on macro events through bonds and currencies, holding positions over the short to medium term.

Moving into dry bulk shippers
That might be why dry bulk shippers were attractive to the legendary investor. In Soros Management’s most recent 13-F holding, we found that six of his recent additions included dry bulk shipping companies: DryShips Inc. (DRYS), Navios Maritime Holdings Inc. (NM), Navios Maritime Partners LP (NMM), Safe Bulkers Inc. (SB), Diana Shipping Inc. (DSX), and Baltic Trading Ltd. (BALT). Since shipping companies are largely driven by rates set by the market, shipping stocks rise and fall primarily because of where shipping rates are expected to head over the next few months and quarters.

Not-so-small positions
Relative Soros’s portfolio, these positions were small. But don’t let that fool you because quite a few of these shipping companies are trading below $1 billion in market cap. These are much smaller than other positions that Soros holds, which includes Apple Inc. (AAPL), Google (GOOG), and Microsoft (MSFT).
If we aggregate all these shipping companies’ positions together, take into account that dry bulk shippers have smaller market cap, and consider the fact that company CEOs hold a significant portion of total shares outstanding (this reduces liquidity in the market), these new positions are quite significant.

Yet the market isn’t all that enthusiastic about the fund’s stake in dry bulk shippers, while it has been for Soros’s Microsoft stakes and Buffett’s Exxon Mobile stakes.

Continue to Part 2: As the Baltic Dry Index turns, Soros tests dry bulk shipping