Why I’m Betting on This “Investor Death Trap”

“It’s been a death trap for investors.”

That’s what Warren Buffett called the airline industry in 2013.

From 1977–2009, airlines struggled to make a profit. Intense competition and rising oil prices made it nearly impossible for them to make money.

Over a 32-year period, the airline industry lost $52 billion.

But something changed right around the time Buffett commented on airlines…

It’s a trend that triggered a 275% gain in the sector over the past six years.

That trend is consolidation.

With so many airlines in the market, prices dropped as they competed for passengers. So they started merging.

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There were five megamergers from 2005–2012:

  • US Airways merged with American West Airlines.

  • Delta Air Lines merged with Northwest Airlines.

  • United Airlines merged with Continental Airlines.

  • Southwest Airlines merged with AirTran Airways.

  • American Airlines merged with US Airways.

Mergers made it easier for airlines to fill flights.

For instance, Delta and Northwest each had routes from Denver to Minneapolis. When they merged, they could eliminate one of them.

They also reduced competition, which allowed airlines to raise prices.

As you can see in the chart below, since bottoming in 2011, the industry has risen 275%.

Here’s why I’m telling you about the airline consolidation trend… We’re about to see it happen in another transportation industry.

  • Like airlines, investors have beaten down this industry.

  • Like airlines, investors have lost a lot of money in these companies.

  • Like airlines, there has been massive consolidation.

  • And, like airlines, these companies are about to soar.

The industry I’m talking about is marine shipping.

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Rising From the Depths

Over the past two years, the shipping industry has seen six major mergers.

In 2015…

  • COSCO Group and China Shipping Group merged to create Asia’s biggest container line: COSCO Shipping Holdings.

In 2016…

  • CMA CGM SA merged with Singapore’s Neptune Orient Lines.

  • Maersk Line bought Hamburg Süd.

  • Japan’s three largest shipping companies (Hanjin Shipping, Kawasaki Kisen Kaisha, and Mitsui OSK Lines) agreed to merge their container shipping businesses.

In 2017…

  • Hapag-Lloyd AG completed its acquisition of United Arab Shipping Company.

  • The newly revamped COSCO Shipping Holdings offered to buy Orient Overseas (International) of Hong Kong.

These mergers will give shipping companies the ability to consolidate routes and pack their boats. They’ll also have more control over fares.

If that sounds familiar, it is. That’s exactly what consolidation did for the airline companies.

The companies will complete most of the merger deals this year or early next year. And when they do, their stocks should rise just like airlines did.

Right now, investors are betting on this happening.

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An Uptrend Has Started

As you can see below, the industry has headed higher this past year after bottoming out in 2015.

If the consolidation trend plays out in shipping as it did in the airline industry, stocks will soar about 275%.

But that might be conservative. Here’s why…

Shipping industry stocks have fallen over 95% since late 2007.

My colleague Nick Giambruno is the senior editor of Crisis Investing. He’s one of the best out there at finding distressed assets at bargain prices.

In his May newsletter issue, Nick said the shipping industry is due for a turnaround… and soon. Here’s what he said:

The shipping industry has now been in a bear market for eight years and counting. That’s the bad news. The good news is that the shipping cycle usually lasts about seven years. It takes a long time for supply and demand to balance out. The turning point could be close.

The Guggenheim Shipping ETF (SEA) is one way to play this trend.

SEA tracks the Dow Jones Global Shipping Index, which contains many of the companies that have grown through mergers.

It’s not a perfect play, but it’s the closest ETF you can consider.

If you prefer individual companies, consider those held by SEA… or the ones that recently completed mergers.

This is a speculative opportunity. So don’t bet the mortgage on it.

Regards,

Nick Rokke, CFA
Analyst, The Palm Beach Daily

P.S. Nick is the globetrotting companion of legendary crisis investor and longtime PBRG friend Doug Casey. Over the past four decades, Doug has consistently flipped global financial crises into fortunes.

Today, Nick tells me that he and Doug have found a small shipping company capable of rising 1,000% during the next shipping boom. It’s one of the biggest dry bulk shipping companies in the world. And as shipping rates rise, so should its profits. You can learn more about Crisis Investing here.

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