A run on shipping stocks proved the rising tide that lifted all ships in early trading on Friday, with several shipping companies opening even and then experiencing a heavy run of buying that drove them higher in the first half-hour of trading followed by a sharp pullback.
Among the day’s biggest gainers were Genco Shipping and Trading (GNK) , up almost 35 percent; Eagle Bulk Shipping (EGLE) , up about 12 percent; and Baltic Trading (BALT) , up just over 4 percent; all on extremely heavy volume.
A number of factors could be driving this wild action, including momentum plays by traders, a short squeeze on Genco’s stock following the announcement of a bankruptcy deal for the debt-ridden company, institutional buyers shifting their exposure to shipping, and recent enthusiasm for investment in the shipping industry.
Bankruptcy Prompts Buying Spree?
Genco has been in the news lately after a large portion of its $1.9 billion in liabilities coming due at the end of March. Genco missed payments, asked for extensions to work out a deal with lenders, and announced Tuesday that a “definitive deal” would need to be reached by Friday. Thus, news after market close on Thursday that the company has arrived at a deadline deal with lenders for a Chapter 11 filing would appear to be the catalyst for the huge spike in the stock.
However, trading action on the stock points to more than just a simple jump based on investors liking the bankruptcy filing. For starters, the bankruptcy deal soaks shareholders. Bad. The bankruptcy filing gives control of 94 percent of the company’s equity to the banks coming to the rescue and issues current shareholders seven-year warrants good for just a 6-percent stake in the company.
Seeking Alpha’s The Specialist estimates shares are worth $0.30 apiece based on the company’s current valuation (or at least the valuation before Friday’s big run), and Maxim Group joined the fray later in the morning when it rated the stock a sell, a rarity for analysts in all but the most extreme cases, and giving it a price target of just $0.25.
What’s more, the news of the bankruptcy filing came out just after the closing bell on Thursday, but the stock opened the day even. It was the massive buying run in the first half hour of trading that ran shares as high as $2.91. That’s a 90.2-percent spike in just half an hour, and it came on extremely heavy volume, with 22.5 million shares moved by 11:30 am ET despite an average daily volume of just 2.42 million and a total float of 44.45 million. While shares pulled back dramatically just before 9:30 a.m., the stock still seemed to settle into prices above $2 a share.
All of this points to the explanation coming in the form of a huge short squeeze. As the company’s huge amounts of debt started to drag it down, the short float rose all the way to 38 percent as the sharks started to circle. As such, any early buying could quickly devolved into a pretty massive short squeeze as the shorts started to cover their position.
Given that the stock was down 67.45 percent from September 9 to yesterday, many of those same shorts may have seen the spike as a chance for profit-taking in what was most likely a very profitable trade on the whole. Add in momentum traders hoping on once the stock started to take off and it’s not hard to see how the stock would take off despite the dreary bankruptcy news.
Industry-wide Gains Indicate More at Play
However, the similar trading action across the industry also indicates that the picture may be a bit more complicated, especially when trying to determine what prompted the initial buying for a stock that suddenly only represents 6 percent of total equity.
Part of this could be related to generally bullish sentiments on the near-term future of the shipping industry.
Tuesday brought that China’s purchasing managers index (PMI) for March was at 50.3. Any number over 50 shows expansion, and this was ahead of economist estimates of just 50.1. Increased manufacturing in China helps shipping companies coming and going, with more raw materials flowing into China and more finished products flowing out.
And that data likely played a role in the decision by global private equity firm KKR to purchase $150 million in loans from an Indonesian oil and gas shipping group and two European banks. This comes amidst a flurry of buying surrounding the shipping industry in recent months, with many appearing to come around on the value of the industry’s considerable debt.
"Through buying shipping loans at a discount, investors are entering at a lower threshold. The freight market right now is OK, so companies will likely be able to service loans, thus funds make their 5 percent, which is a nice carrying yield," said one trade finance source quoted by Money News.
"If the market goes up, their loans will appreciate, thus there will be additional benefit and return. If the market goes to hell or they think they can find a better management team, then they just take over the vessels and become shareholders and own the business."
Industry-wide Short Squeeze?
Shipping can be a notoriously volatile segment due, ironically, to its relative stability. The massive ships used to move goods around the word take years to build, leaving shipping companies largely unable to change supply in reaction to short-term fluctuations in demand. The result is that shifts in demand can have an extreme effect on shipping prices. The Baltic Dry Index, the best indicator for the price of international shipping, recently plunged to a six-month low of 1,235.
So, with potentially improving manufacturing in China, shipping could be on the verge of an upswing, something likely noticed by institutional buyers. This could have resulted in early buying in the segment, with Baltic Trading1 and Diana Shipping (DSX) both gapping up at the opening bell.
And, if that movement from two of the major players resulted in a broader momentum play driving up the whole industry, that could have been all that was needed to prompt a short-squeeze across a number of shipping companies. Of the 49 publicly-traded shipping companies, there’s an average short float of 4.57 percent. Much of this is driven by just two companies: Genco’s 38 percent short float and Eagle Bulk Shipping, the day’s other biggest mover, at 33 percent.
So, for an industry packed with small- and micro-cap companies that tends to move in unison, it’s easy to imagine that Baltic and Diana trading up could have sparked an upswing for Genco. Which could have, in turn, sparked a huge short squeeze based on the company’s recent bankruptcy news. Which, in turn, likely started to ripple out across the rest of the shipping segment, potentially causing shorts to bail from their position in other stocks.
1Baltic, it should be noted, was actually formed by Genco and uses Genco for the strategic and commercial management of its fleet. This could mean that Genco’s survival was viewed as a positive for Baltic, but Baltic’s market cap at the start of the day was more than 5 times larger than that of Genco.
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