David Frischkorn sees a raft of shipping stocks trading below $5 per share and asks himself why.
He recognises shares have been under pressure — shipping has fallen out of favour with investors in recent years for many reasons, including a lack of sustained earnings.
But the former investment banker for firms such as Jefferies, Dahlman Rose & Co and Seaport Global Securities scratches his head because, in his view, share price ultimately is entirely within the shipowner’s control — with a catch.
No magic trick
“You can't raise your market capitalisation by any sort of magic trick, that's true,” Frischkorn tells TradeWinds in an interview near his home in Houston.
"But what you can do is carry out a reverse split and get the stock significantly above $5. In that way, if people want to buy your stock, there's no penalty in buying it. It has margin value.”
This is where it gets a little technical and complicated, but it also explains why Frischkorn is so concerned about the magic $5 figure.
First, a reverse split sees a company reduce the number of shares outstanding while the remaining shares increase in price by a corresponding amount.
These shares were trading below $5 at the end of last week:
Danaos Corp: $0.79
Diana Shipping: $3.16
DryShips: $4
Dynagas LNG Partners: $2.25
Euroseas: $0.72
Globus Maritime: $2.81
Navios Maritime Holdings: $4.33
Navios Maritime Partners: $0.91
Nordic American Tankers: $2.09
Pangaea Logistics Solutions: $3.48
Performance Shipping: $1.10
Safe Bulkers: $1.65
Scorpio Bulkers: $4.74
StealthGas: $3.54
Teekay Corp: $3.82
Teekay Offshore Partners: $1.38
Teekay Tankers: $1.07
Top Ships: $0.70
Tsakos Energy Navigation: $3.25
Now about margin value.
Under rules of the US Federal Reserve System, when a stock trades above $5, an investor can establish a margin account and borrow against the value of the investment of that stock, up to a 50% maximum.
The account can be used to buy more stocks or for whatever purpose the investors need the funds.
However, stocks trading below $5, are not “marginable” because of the greater perceived risk associated with them, and thus present investors with yet another reason to avoid them.
Such stocks may also be more difficult for brokers to recommend to their clients.
Technical impediments
"These are what I see as technical impediments to the trading of the stock," Frischkorn says.
"While there's no magic bullet to fixing your market cap, you can try to address the technical impediments. If more people can buy your stock, it should trade up.”
Frischkorn is retired after departing his position as managing director at Seaport Global in December 2017, but he follows shipping equities and is known to have privately made his case to several owners on this issue.
One of them is Scorpio Tankers’ president Robert Bugbee, who tells TradeWinds that Frischkorn’s counsel was valuable as Scorpio thought long and hard about its own anaemic share price, which had hovered at around $2 for months.
Scorpio first flagged its intentions of a split last December, when Bugbee explained the rationale to analysts on an earnings call. “The sweet spot in the stock price is between $10 and $20, as it is for many stocks. It’s why you see a lot of IPOs [initial public offerings] come to market in a range between $13 and $17,” Bugbee said at the time.
Widening range of investors
“We’re opening up the range of people who are able to invest in our stock,” with the prospective split, Bugbee said. “There are many funds who can’t invest in a stock that is trading under $10, and then there are other issues below $5.”
Under a reverse split, a company’s market capitalisation does not change. It simply has fewer but higher-priced shares.
Scorpio carried out a 1-for-10 reverse split in January, sending the share price from $1.98 to $19.80.
It has mainly been good news since, with the shares trading above $25 this week. And while there have been other factors, like optimism towards a recovering product market ahead of the IMO 2020 emissions deadline, the reverse split certainly has not hurt.
Looking back on the move, Bugbee tells TradeWinds: "David is a cerebral person who has been a good friend to us at Scorpio and before that at OMI [Corp] and he thinks a lot about issues like this.”
"When we were thinking about doing the reverse split, David is one of the people we spoke to who was strongly supportive and strongly in favour when we rang him up.
Some people are afraid that the reverse split happens and people can't do the math and the stock will slip down where it was. That’s a fear and it's been a fear for 20 years
David Frischkorn
Difficult decision
"It wasn't an easy choice and we thought long and hard on it. We also had some strong support from some of the long-only institutional holders in our base. We're thrilled with the result. In hindsight, David's advice wasn't good, it was great.”
So why don't more of those sub-$5 companies listen? TradeWinds counted 19 such names among its stock index this week, with several others hovering just above the $5 mark.
"It's very simple. These management teams think their stock is going back up without a split,” says one veteran public chief financial officer.
“Now it may not be, but they always think that it is.”
Financial and legal costs
He adds that there may be financial and legal costs attached and, perhaps worse, the fear that once the split is carried out, the stock may fall backwards again.
There is also the issue of negative association, as many shipowners conduct reverse splits only when they have fallen below the $1 level and need to artificially inflate the share price to retain their listings under stock-exchange rules.
Perhaps adding to the stigma, three owners now under federal shareholder litigation in the US over dealings with financier Kalani Investments — DryShips, Top Ships and Diana Containerships — used repeated reverse splits. Plaintiffs have alleged that this was a securities fraud “scheme”.
All defendants have strongly denied the allegations, saying the splits were in their companies' best interests. All three owners have asked for the shareholder suits to be dismissed over lack of evidence.
Frischkorn has heard all the reasoning for not carrying out splits proactively, but won't accept it.
“Some people are afraid that the reverse split happens and people can't do the math and the stock will slip down where it was. That’s a fear and it's been a fear for 20 years,” he says.
"But it’s a needless fear. That doesn't need to happen.”
