Readers Choice: This Shipping Company Is the Star of the Open Seas

|August 5, 2022

Shipping companies have gotten a lot of attention lately thanks to supply chain issues. And there are still plenty of profits to be made in this sector.

That’s why I was more than happy to review a reader-submitted company for this week’s Stock of the Week.

It’s a diversified dry bulk carrier with a large fleet and good numbers. It hauled in $305 million in revenue in the first quarter.

And it also meets my proprietary metrics for growth, value and income. Not to mention that its cash return on capital invested (CROCI) is a solid 18.8%.

For those reasons and more… the stock could easily break its all-time highs this year.

Get all the details on the stock – including its ticker – in this week’s Stock of the Week.

Click on the image below to watch it.

Transcript

It’s Stock of the Week time again. It’s the time when I pick a stock… or my audience does. This week, it’s a stock from one of you.

We’ve got Star Bulk Carriers (SBLK).

It certainly caught my attention because of the “bulk carrier” in its name. We know there are supply chain issues. Surely there are going to be a lot of profits made at this time.

Star Bulk is a shipping company that engages in the ocean transportation of dry bulk cargos.

The company’s vessels transport a range of major bulks, including iron ore, coal and grains – that ticks a lot of boxes in terms of what the world needs at the moment – plus bauxite, fertilizer and steel products. Well, maybe its steel business will take a hit if there’s a recession globally. But the company is diversified. That’s important.

As of the end of last year, Star Bulk had a fleet of 128 vessels. That’s pretty big.

It reported strong results for the first quarter of 2022, as you’d expect. It made $220 million in EBITDA (earnings before interest, taxes, depreciation and amortization).

By the way, a note on EBITDA… Warren Buffett hates it. And I don’t particularly like it because it’s profits before you take out tax or account for the depreciation of assets or amortization – which is depreciation, but for debt. So it’s profits before you take out all these other things that should be taken out of profits. Well, that’s artificial profits, or as Warren Buffett says, “Who’s going to pay for those other things? The tooth fairy?”

So EBITDA artificially inflates profits. Using net income is a little bit better. At $170 million, it’s closer to the actual profit figure. Look at that difference between EBITDA and net income. That’s about a $50 million difference.

That’s why Warren Buffett doesn’t like EBITDA. He tends to prefer, as do I, the more conservative figure, the lower figure, for profits, if there’s a different way of measuring profits. And that income is on revenues of $304 million. So Star Bulk is pretty good at turning revenues into profits.

This is a good company in terms of backstory. In terms of headline numbers, let’s dive deep into some of those numbers.

The stock’s Growth-Value-Income Rating is 9. Remember, that’s based on my proprietary algorithm, which looks at valuation, revenue growth, dividend yields and momentum. A whole bunch of factors. I then score it out of 10 by weighing those individual factors. For instance, valuation has a bigger weight than growth – revenue growth, profits growth – and cash flow is right up there as well. So 9 out of 10. Good. As long as it’s above 7, that’s good.

The stock hits 18.8% on CROCI (cash return on capital invested). What’s that? Why is that important?

Well, as you’ll remember, it’s a formula invented by Deutsche Bank and used by Goldman Sachs Wealth Management for their wealthiest clients. And what they found is companies each year in the top quartile, the top 25% by CROCI, tend to – if you were to hold them for 12 months and then pick another batch the next 12 months in the top quartile and so on – average a return of about 30% per annum. It’s not guaranteed, and it’s not the same companies every year, but as a basket over the long term.

This stock is in the top quartile. That’s good.

Momentum’s strong. Sortino is good at 0.65. Sortino is a measure of the average return versus the risk, or volatility, of missing that. And if that number’s above 1, that’s ideal, but few stocks are. And above 0.3, 0.4, I’m happy with that.

Star Bulk checks a lot of boxes… but one box that worries me is volatility, which is at 33%. I really want volatility under 20%, especially now, when the market looks a bit shaky.

Forecast growth in turnover is expected to drop a bit. That’s likely due to some supply chain constraints going away. As a result, demand is expected to drop. So a 10% drop in turnover is a bit of a worry.

But other than that… I see good numbers on return on capital invested, return on equity, those kinds of shareholder returns.

You can see turnover’s been increasing. Cash flow has been good. Profitability is a bit hit and miss, but it’s had a good return so far. Net asset value is up. Total assets are up.

So when you look at those three parts of a company’s accounts – balance sheet, cash flow, and profit and loss – we have some good numbers on those. You won’t get something hitting everything.

Now let’s look at the more important thing here for me right now, which is the chart. This informs our immediate decision making.

The weekly MACD – which is a measure of momentum – has bottomed out and is starting to go up. I think this is a company which by year’s end will definitely break the all-time high that you can see on the chart. I think it’ll go from its current level of around $26-ish to above the all-time high.

This was a really good Stock of the Week from one of you. Thank you for sending it in.

You can see all the data and charts I looked at for Star Bulk by watching the latest episode of Stock of the Week.