(Image: Zen Buddha Silence, by Marilyn Barbone)
May 10, 2020
We continue with examples of Boole’s quantitative investment process in action.
Previously, we looked at Ranger Energy Services (RNGR): https://boolefund.com/ranger-energy-services-rngr/
Before that, we looked at Macro Enterprises (Canada: MCR.V): https://boolefund.com/macro-enterprises-mcr-v/
This week, we are going to look at Teekay Tankers (TNK), which is the largest public mid-size oil tanker company in the world. TNK has high quality assets.
First we screen for cheapness based on five metrics. Here are the numbers for Teekay Tankers:
- EV/EBITDA = 4.35
- P/E = 2.44
- P/B = 0.62
- P/CF = 1.31
- P/S = 0.54
These figures—especially EV/EBITDA, P/E, and P/CF—make Teekay Tankers one of the top twenty cheapest companies out of over two thousand that we ranked. (Note: This assumes that Q419 revenues, EBITDA, earnings, and cash flows are maintained, which has more than been the case thus far in 2020. The current market capitalization is $616 million.)
Next we calculate the Piotroski F-Score, which is a measure of the fundamental strength of the company. For more on the Piostroski F-Score, see my blog post here: https://boolefund.com/piotroski-f-score/
Teekay Tankers has a Piotroski F-Score of 8. (The best score possible is 9, while the worst score is 0.) This is excellent.
Then we rank the company based on low debt, high insider ownership, and shareholder yield.
We measure debt levels by looking at total liabilities (TL) to total assets (TA). Teekay Tankers has TL/TA of 55.8%, which is decent.
Insider ownership is important because that means that the people running the company have interests that are aligned with the interests of other shareholders. At Teekay Tankers, insider ownership is approximately 17%.
Shareholder yield is the dividend yield plus the buyback yield. The company has not bought back shares, but has instead issued a small amount of shares. However, the dividend yield is 0.17%, which mostly offsets the newly issued shares. Thus, shareholder yield is practically zero.
Each component of the ranking has a different weight. The overall combined ranking of Teekay Tankers places it in the top 10 stocks on our screen, or the top 0.4% of the more than two thousand companies we ranked.
The final step is to study the company’s financial statements, presentations, and quarterly conference calls to (i) check for non-recurring items, hidden liabilities, and bad accounting; (ii) estimate intrinsic value—how much the business is worth—using scenarios for low, mid, and high cases.
Here is the company’s Q419 Earnings Release: https://www.teekay.com/wp-content/uploads/2020/02/TNK-Q4-19-Earnings-Release.pdf
Oil tanker rates have been much higher on average during the past couple of months. This is largely due to floating storage demand as the crude oil futures curve moved into a contango pricing structure, meaning that it has been profitable to buy oil now, store it on oil tankers, and sell it at the higher prices a few months in the future.
Note that the fundamentals for oil shipping were already firm before the recent spikes in oil tanker rates. These fundamentals—based on the supply and demand for oil tankers—should be strong in 2021 and 2022.
It may take at least 6 months for oil demand to recover, given the impact of the coronavirus. But in the near term at least, demand for floating storage will continue as long as the crude oil futures curve is in contango.
Intrinsic value scenarios:
- Low case: If the recovery in tanker rates is interrupted, then Teekay Tankers is probably worth book value of $29.41 a share, which is about 60% higher than today’s $18.30.
- Mid case: If tanker rates continue to recover—which is likely based on the supply and demand for oil tankers—then Teekay Tankers is probably worth at least 150% of book value. That’s $44.12, which is over 140% higher than today’s $18.30.
- High case: Under a full market recovery, Teekay Tankers is probably worth a P/E of 10. That works out to $74.88 a share, roughly 310% higher than today’s $18.30.
BOOLE MICROCAP FUND
An equal weighted group of micro caps generally far outperforms an equal weighted (or cap-weighted) group of larger stocks over time. See the historical chart here: https://boolefund.com/best-performers-microcap-stocks/
This outperformance increases significantly by focusing on cheap micro caps. Performance can be further boosted by isolating cheap microcap companies that show improving fundamentals. We rank microcap stocks based on these and similar criteria.
There are roughly 10-20 positions in the portfolio. The size of each position is determined by its rank. Typically the largest position is 15-20% (at cost), while the average position is 8-10% (at cost). Positions are held for 3 to 5 years unless a stock approaches intrinsic value sooner or an error has been discovered.
The mission of the Boole Fund is to outperform the S&P 500 Index by at least 5% per year (net of fees) over 5-year periods. We also aim to outpace the Russell Microcap Index by at least 2% per year (net). The Boole Fund has low fees.
If you are interested in finding out more, please e-mail me or leave a comment.
My e-mail: firstname.lastname@example.org
Disclosures: Past performance is not a guarantee or a reliable indicator of future results. All investments contain risk and may lose value. This material is distributed for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. No part of this article may be reproduced in any form, or referred to in any other publication, without express written permission of Boole Capital, LLC.