The logistics world has been facing a crisis ever since the onset of the pandemic disrupted the supply chain. Now, Russia’s invasion of Ukraine, followed closely by the upsurge in COVID-19 cases in the second-largest economy in the world, China, gave the supply-chain crisis a new direction — supply bottlenecks.
Actually, supply bottlenecks and disruptions have their roots going back to Brexit, but they were not felt so deeply until the pandemic hit. The pandemic aggravated the supply-chain issues, and the recent geopolitical tensions and China’s lockdowns early this year gave a fresh impetus to the situation.
China’s ports started jamming due to its zero-tolerance policy to curb the spread of the virus earlier this year, as international trade was limited. This meant that the U.S. could not export as many goods to China as planned, giving rise to shipping container pile-ups in its ports.
Another affair was also jamming U.S. ports simultaneously, and that was the Russia-Ukraine hostility and sanctions on Russian trade.
Why is the Supply Chain Important?
Simply put, goods that are manufactured reach consumers through a systematic logistics system better known as the supply chain. Trade restrictions that were imposed by governments all over the world led to supply bottlenecks, and it took time for goods to be exported.
A proper supply-chain management system has the power to improve a company’s business. Thus, companies across various industries started getting affected. Since goods were not reaching consumers on time, manufacturing slowed down, paving the way for many other hiccups at various stages of the supply chain.
Port Congestions Keep Supply-Chain Recovery at Bay
The Russian invasion of Ukraine exacerbated the issue of port congestion. So much has the situation gone out of hand that it is starting to overwhelm the ports, especially the ports of New York and New Jersey.
It is a scene on the U.S. ports, logjammed with numerous colorful shipping containers piled up on ships waiting to either depart or offload, or offloaded containers waiting in the port yards to be taken to their destinations on trucks, ships, or by rail.
Ports along the West Coast have been relieved of some of their backlogs by ocean shipping lines. However, the situation is the opposite in the East Coast ports, where congestion has flared up.
What This Means for the Shipping Industry
Port congestion, which has caused product shortages during the pandemic, has pushed freight rates higher. This has had a strong hand in adding to the soaring inflation in the U.S. Nonetheless, what is bad news for others is good news for shipping companies, which are getting to capitalize on the high rates.
Also, industrial demand from economies all over the world is high as the economic recovery after the pandemic continues, meaning demand for shipping is expected to continue.
Another interesting thing to note here is the consistent shift of dry bulk carriers (carriers transporting raw material commodities like coal or iron ore) to container carriage (that carry general merchandise items), driven by the attractive rates of container shipping.
This shift is taking competition away from the dry bulk market, which is pushing the rates of dry bulk freight up.
These multiple price drivers are keeping the shipping market hot, overshadowing supply issues related to China’s lockdown and reduced dry bulk imports.
These apart, a ramp-up of fleet additions is expected to help buoy the growth of shipping companies further. Research firm IHS Markit projects 4.5% year-over-year container fleet growth in 2022 and 7.5% growth in 2023. This indicates an acceleration of container fleet growth from 2021’s 4.3% growth.
Two Potential Portfolio-Boosting Shipping Stocks
The shipping market is expected to remain red hot at least until the shipping bottlenecks are eased out. Moreover, even as the strength that the sector is experiencing will eventually even out, the market is still expected to grow.
The following stocks stand to make the most of this rally, making them good investments to consider.
Pangaea Logistics Solution (NASDAQ: PANL)
Maritime logistics solutions provider Pangaea is benefiting from strong fundamentals and higher freight rates. The stock has returned 75% year-to-date.
The company enjoys a leading position in the niche ice-breaking fleet industry, which gives the company an edge. Noble Financial analyst Michael Heim noted that despite Pangaea’s performance running the risk of being hurt from demand normalization, its ice-breaking fleet leadership will be a consistently strong growth driver.
In terms of valuation, PANL stock looks attractively priced, trading at just 3.6 times its price/earnings, in line with the industry median.
Pangaea is currently generating returns on capital employed (ROCE) of about 15%, meaning that the company is earning $0.15 per dollar of shareholder capital invested. Moreover, over the past five-year period, the company’s market capitalization has almost doubled. This proves that Pangaea is highly capable of reinvesting in its business effectively and successfully.
These strengths make the Pangaea stock worth looking further into. Moreover, Wall Street is optimistic about the stock, with a Moderate Buy rating based on two Buys. The average Pangaea price target is $7.50, impying 14.5% upside potential.
Golden Ocean Group (NASDAQ: GOGL)
Golden Ocean owns and provides vessels for dry bulk transport, primarily. It also engages in the charter, purchase, and sale of vessels. The company has gained 69.6% so far this year.
Even though the company’s top and bottom lines are expected to decline in 2022, given the headwinds from the broader market, the improving conditions of its business in the short-to-medium term recently buoyed analyst sentiments.
Earlier this year, when China was under aggressive COVID-19 restrictions, slowing steel production in the country had put pressure on shipping rates. However, with lockdowns in Shanghai easing, manufacturing is slowly returning to normal levels. This is expected to bode well for Golden Ocean.
H.C. Wainwright analyst Magnus Fyhr recently reiterated a Hold rating on GOGL stock but raised the price target to $18 from $13. The analyst noted that the stock is currently trading at a premium to the dry bulk logistics industry, which is justified, given its market capitalization, solid track record, and historical premium to Net Asset Value.
Moreover, the general consensus of Wall Street analysts covering GOGL is that the stock is a Moderate Buy based on one Buy and two Holds. The average GOGL price target is $19.31, implying 22.5% upside potential.
Ending Note
Shipping bottlenecks are pushing freight rates higher, which is benefiting most shipping companies. Though the increased rates will eventually tone down freight demand, and ports will clear up as well, Pangaea and Golden Ocean are expected to be perfectly positioned to make the most of the rally while it lasts, making them good bets for the short-to-medium term.
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