If you read my article describing the strategy for trading shipping stocks this week, you saw me declare a strategy in which I advised you to: 1. Buy shipping, 2. Sell just before earnings, 3. Wait for a pullback post-earnings to settle, then 4. Buy back in.
This is a strategy to use when a sector is recovering from being oversold, but the overall market is depressed. With the Baltic soaring, (BDI) the shippers were finally entering favorable business conditions, but the market was clinging to a pattern of a repeated selloff on even moderately favorable earnings or news.
But then, something happened to change market sentiment. Let’s play back the moment…
First this morning, DHT missed its figures. "Double Hull Tankers misses by $0.03, reports revs in-line (4.65 ) : Reports Q1 (Mar) earnings of $0.26 per share, excluding non-cash expenses, $0.03 worse than the First Call consensus of $0.29; revenues rose 19.8% year/year to $29.8 mln vs the $29.6 mln consensus." It was nice that the company managed to hit its revenue figure but I was expecting the company to be sold off, perhaps gently, but firmly nevertheless.
No sell off. In fact, the stock began crawling up a bit. What had happened? I looked around. Bingo. Finally, someone, somewhere, had noticed that BDI had been increasing for 11 straight days and now every shipping company in the world with charters available was capable of profitable new contracts. Dahlman Rose, rogue downgrader of shipping for the previous semester, was now upgrading key shippers: "In response to their expectation of higher vessel values and continuing demand from China the firm is upgrading DSX, EGLE, GNK, PRGN SB and SBLK to Buy from Hold and also upgrades EXM to Hold from Sell".
Suddenly, Paragon (PRGN) shows up in the news, saying that they are announcing earnings after market close. I put the news out in the trading room: "Paragon often gives nearly no warning when it is going to announce earnings, and today was no exception. They have given us only one trading day to buy or sell before earnings. Typically, dividend is announced at the same time. There is a SMALL but non-zero possibility that PRGN intends to raise its dividend, by a nominal amount, and will make the announcement today. If so, there is a large upside potential. If not, there is today a reduced downside potential because of the upgrade in the stock this morning. So, this is a trader’s advantage day, and a good point to consider the $5 June call QXTFA which you should be able to pick up for 35 to 40 cents. Stock is at $4.35, up almost 11% today on the upgrade. I have a fairly large position in QXTFA which I acquired about 3 weeks ago."
An hour later, I realized that the situation may be changing. "I am in a quandry regarding PRGN. My calls now all are green, for the first time in at least a month. But PRGN earnings are at close. Sentiment changed with the upgrades. Now, for instance, DHT earnings miss resulted in DHT rising 3%. Of course, they beat their revenues, too. So, a decent earnings report from PRGN would likely result in a nice boost. A dividend increase would send it to $6 in a flash. I know I said in my article that the rule was to sell before earnings, but it is not such a simple thing now. Last time, PRGN fell $.47 after the earnings report, due to a miss, but the sentiment was more negative. So, now, it is a throw of the dice. I am leaning to keep the calls."
With only 40 minutes before the close of the day, I was sweating. I did some crude estimates and wrote: "I studied this a bit more, and I think there is a fair chance of the company beating its 52 cent earnings estimate this time. That is one cent less than the last estimate, and matched the result last quarter, minus charges. So, the average BDI this quarter is much higher than last quarter, and given that PRGN does not use debt to buy ships right now, and retained earnings last quarter, it looks at least reasonable for them to beat in a modest way. Doing so would cause more short covering and could add 50 cents to the stock price in minutes. It appeals to my sense of good odds, so I will go for it. Keeping my fingers crossed." I waited for the bell, and a few minutes afterwards, the news was released:
Paragon Shipping reports Q1 EPS of $0.54, ex-items, vs $0.50 First Call consensus; revs increased 2.7% y/y to $41.6 mln vs $35.97 consensus (4.74 +0.81)
Wow! Within minutes PRGN was trading in extended hours as high as $6.20! It finally settled at about $5.70, up over 45% on the day, and one of the biggest gainers of the entire market.
We have had what is known as a change of sentiment. The upgrades set the stage, but what the market loves is a sleeper which skyrockets. It is every trader’s dream. The remarkable aspect is the shift in expectations – in the environment of upgrades and overperforming earnings, a skyrocket stock sprinkles a blessing on its less fortunate companions.
So, a change in strategy is called for. Continue buying favored shipping stocks, but especially concentrate on ones which have upcoming earnings. As before, ESEA is a prime choice. But now, do not sell all before earnings – instead, hold a portion through earnings, and have yourself in a position to benefit from a sector uplift, an uplift which is now less hostile to good, or even mediocre, earnings from shippers. Good luck!
By the way, I have received some emails from people from Google Finance where I used to hang, asking where I am, what I am recommending and trading, etc. In Google I used the handle "Curious Violet". But here at MyHappyTrading.com I am "Skymist". They are one and the same. So to all those from my old venue, welcome!
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