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The Genco Trade: Steven Cohen, Dry-Bulk Bull

SAC Capital, the hedge fund run by billionaire investor Steven Cohen, has placed an enormous bet on Genco Shipping & Trading. Here's the thesis behind their bullish trade.
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NEW YORK (TheStreet) -- Now is the time to go long Genco Shipping & Trading (GNK) - Get Genco Shipping & Trading Ltd Report shares, at least according to Stevie Cohen.

The reclusive billionaire investor -- at one time known as the "king of hedge funds" -- has taken an enormous position in Genco stock, making his fund,

SAC Capital Advisors

, the company's largest shareholder outside its founder, Peter Georgiopoulos.

According to a filing with the

Securities and Exchange Commission

after the close on Tuesday, SAC has acquired more than 2.1 million shares of Genco, or 6% of its outstanding stock. (Georgiopoulos, the shipping tycoon behind crude-tanker operator

General Maritime


as well the all-spot-market dry-bulk carrier

Baltic Trading


, owns about 4.3 million shares of Genco, or 12%.)

SAC's trade caused a buzz within maritime investor circles. It was the talk of a shipping industry conference held by Jefferies & Co. Wednesday at the Mandarin Hotel in New York, where executives gathered to give their spiels -- including Genco's chief financial officer, John Wobensmith, who, naturally, is a

dry-bulk bull himself


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Dry Bulk Bullishness

Will the Genco Trade Work?

It sparked such interest partly because of the sheer size of SAC's bet (relative, at least, to the small-cap world of shipping equities), and partly because dry-bulk stocks have suffered all summer from some serious disinterest.

No surprise there: in June and early July, day rates on the spot market for the services of dry-bulk cargo haulers -- which transport such things as iron ore and grain and coal across the seas -- all but collapsed.

Add in the pre-Labor Day investing doldrums, when half of Wall Street takes off for the beach, as well as a goodly amount of macro-economic angst, and you had a recipe for steep share-price declines throughout the dry-bulk sector. (Not to mention the fact that retail investors, once dry-bulk stalwarts, have largely cycled out of these names in the wake of the financial crisis.)

>>Genco Shipping: Trade the Range

The thesis behind the Genco trade seems about as simple as it can get: Buy low. Which is what Genco did when it acquired 18 ships for about $550 million in mid-June, just as dry-bulk rates were suffering through their summertime crash, which also weighed on asset values.

To be sure, the company levered up and diluted shareholders to make the purchase -- using 60% debt and 40% equity, roughly. Some have described the acquisition as risky -- like buying a call option on the health of the dry-bulk industry. But, according to the bulls, that's a good thing, as it has put Genco in a position now to benefit should freight rates run higher.

Most of Genco's newly acquired ships -- 13 Supramax and five Handymax vessels -- didn't have charter contracts at the time of the deal. Thus, the company has been free to seek out long-term charters for those ships, locking in between one and two years of steady cash flow. As it turns out, dry-bulk rates have rallied. If Genco were to fix one of its Supramaxes on a charter right now, for example, it could fetch more than $20,000 a day, which would translate into daily cash-flow of about $9,000. (The all-in breakeven point for a Supramax ship, including interest on the debt used to buy it, is about $11,000 a day.)

SAC's portfolio managers appear to believe, then, that Genco's stock is cheap, and that Wall Street analysts have forecast the company's 2011 profit far too low. (The consensus target stands now at $2.90 a share.)

Another way of looking at the trade: Historically, Genco's stock has closely tracked the movement of the Baltic Dry Index, which tracks spot-market rates across all dry-bulk vessel classes. Genco and the BDI have decoupled. While the company's shares have risen 12% since falling to a 52-week low ($14.22) in early July, the BDI over the same period has soared by more than 70%.

In the end, to be bullish on Genco is to be bullish on the dry-bulk business in general. Among this optimistic set, fears that an armada of newly built vessels arriving into service will cause a glut have evidently subsided. As one fund manager points out, rising supply poses the biggest problem for the Capesize market, and will serve mostly to cap how high day-rates can rise, rather than to sink the whole enterprise.

Those investors who are long dry-bulk stocks point to certain demand fundamentals: The coal trade has gathered so much steam that China is importing it from the U.S. The grain trade has grown active in the wake of Russia's export ban on wheat, sparked by devastating wildfires this summer. Construction in China -- which uses steel, which uses iron ore -- is expected to regain its footing this fall. Cheaper iron ore pricing will induce Chinese steelmakers to start buying more of the stuff from the mines of Australia and Brazil.

For all these reasons, the sell side, too, is mostly bullish on Genco. Eight analysts have the equivalent of strong buy ratings on the company's stock; three have hold or neutral ratings.

One of the latter is Greg Lewis, the shipping equities analyst at Credit Suisse, who often appears in his research notes more bull than bear when it comes to Genco. Still, Lewis has maintained a neutral rating on the company's stock, a circumspect view based largely on the very thing that make the bulls bullish: the risk inherent in the Genco trade.

The risk is two-fold: Genco has more exposure to the spot market than its peers -- about 25% of its fleet is hired out on the short-term spot market, compared to an industry average of less than 20%. If rates go south, in other words, Genco's share price will go south faster than the rest of the sector.

Second, to make its more than half a billion dollar wager on a rebound in dry-bulk rates, the company increased its debt load at a moment of historically wide spreads in the maritime lending world -- the going interest rate has been about 200 basis points above Libor. Credit for shipping companies, a year and a half after the worst of the global financial crisis, still doesn't come cheap.

Further, some investors worry that the latest jump in the BDI has been nothing but another head fake -- and that six months from now, demand for dry-bulk shipping services combined with the ineluctable growth in vessel supply will keep freight rates hemmed in. And even if rates strengthen, dry-bulk stocks are such high-beta names that any macro-economic hiccup or broader market selloff could end up overwhelming whatever fundamental vigor might exist in the dry-bulk business. After all, shares in the sector have remained stuck in dry dock even as the BDI has steamed north.

In the end, SAC's Genco trade is most likely a short-term one, an all-in wager that stock prices will, sometime within the last four months of the year, align with the upward movement of shipping rates themselves.

-- Written by Scott Eden in New York


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