Investor Essentials Daily

Shipping companies are riding the wave of the global supply chain problems

August 16, 2022

The supply chain crisis has been all over the headlines for the last few months. The pandemic came at the worst possible time for the transportation industry, as the ‘rolling wave’ of demand exposed the huge underinvestment in the space.

As the famous saying goes “in the midst of every crisis, lies great opportunity.” Those that have benefitted from this opportunity are logistics and shipping companies.

With more than 100 vessels that ply the seas around the world, ZIM Integrated Shipping Services (ZIM) is among these opportunists.

That’s why it showed up on our FA Alpha Screen. Its strong profitability, high growth potential, and low valuations make it an interesting name.

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Supply chains around the world have been struggling to keep up with the increasing demand globally. This is because, since 2008, Corporate America has been underinvesting as much as possible into property, plants, and equipment to keep costs down.

While this created short-term windfalls, the pandemic hit the globe in early 2020 and created a ‘rolling wave’ of demand. For months warehouses were locked up and factories stood still. However, all at once, this pent up demand swept back through the economy, and now companies are struggling to keep up.

While this situation has created many problems for some companies, there are big winners—the logistics and shipping companies.

To these companies, increased global demand means higher demand for the limited space on each existing ship, and higher demand means higher profitability.

One name that is strategically positioned to benefit from this opportunity is ZIM Integrated Shipping Services (ZIM).

ZIM is an Israeli international cargo shipping company, and one of the top 20 carriers around the world.

The company offers both door-to-door and port-to-port transportation services for its customers, including end-users, consolidators, and freight forwarders.

It also handles problems from basic cargo solutions to digital shipping software solutions.

The company’s Uniform return on assets (“ROA”) was above 10% even before the pandemic, which shows how the company was a solid performer even before the supply chain crisis.

Of course, in 2021 returns shot up to 51% as the company expanded its services and fleet lines to accommodate the massive demand after the pandemic.

Considering the tailwinds from increased global demand, and the company’s position as it is smartly adding capacity at reasonable rates, ZIM is poised to use this opportunity and boost its profitability.

However, the market is pricing the company as if globalization is going to end and all global demand vanishes.

For a company that delivers strong returns well above the cost of capital and average corporate returns, a paltry 2x Uniform P/E is a massive bargain for ZIM.

Healthy growth, high returns, and low valuations make ZIM an impressive name for the FA Alpha 50.

Throughout financial market history, many of the world’s most successful investors have been candid in their belief that Generally Accepted Accounting Principles (“GAAP”) distort economic reality.

Warren Buffett, for example, once said investors should “concentrate on the world of companies, not arcane accounting mathematics.”

Investors who neglect the very real issues with as-reported accounting can find themselves caught up investing with the crowd, blindly following hot “themes” without a thorough grasp of how to understand the businesses in question.

The only true way to focus on the “world of companies,” as Buffett suggests investors do, is to present a clear picture of how a business operates, something that can only be done by adjusting financial statements to reflect the arbitrary nature of certain accounting rules that leave much to discretion.

The world’s best investors understand the need to make these adjustments, which allows them to focus not on picking out the most popular companies, but rather on looking for great names in sleepy areas that the market isn’t paying much attention to. From there, the goal is to then identify quality companies with significant growth potential at reasonable prices.

That’s exactly what we’ve set out to do with the FA Alpha, our monthly list of 50 companies that rank at the top for quality, high growth, and low valuations.

This list has outperformed the market by 300 basis points per year for over 20 years now, effectively doubling the performance of the market by focusing on the real fundamentals and valuations of companies with our proprietary Uniform Accounting framework.

See for yourself below.

To see the other 49 names on the list, click here.

Best regards,

Joel Litman & Rob Spivey

Chief Investment Strategist &
Director of Research
at Valens Research

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