Six Quick Stock Ideas From The Latest Round Of 13Fs
Charlie Munger told Monish Pabrai that there were three particularly good ponds to fish in for investment ideas: 13Fs, “cannibals,” and spinoffs.
While I don’t think blindly cloning other investors is a good idea — you can borrow their idea but not their conviction — 13Fs can be a good place to get research ideas. 13F season never fails to generate a stack of new 10-Ks for me to read.
This quarter I thought I’d share some of the stocks that caught my eye and the preliminary research I’ve done on them.
1. Danaos (DAC) — Monish Pabrai
Danaos is a Greek shipping company that trades on the NYSE. They own 68 containerships and have 12 more under construction. Danaos charters its containerships to large operators like Maersk, CMA-CGM, MSC, etc. Charters are staggered and have varying terms. 14 expired in 2024. The portfolio’s average duration is three years, which provides revenue visibility.
Danaos also owns seven Capesize bulk carriers and is under contract to acquire three more. Danos branched out into bulkers in 2023. Weak dry bulk rates have so far made this deworsification. Danaos is keeping its bulkers on short leases or in the spot market until long-term charter rates improve.
Dimitris Coustas founded Danaos Shipping in 1972. His son, Dr. John Coustas assumed control in 1987. Dr. Coustas owns 47.3% of shares, so he has plenty of skin in the game. However, there may be potential conflicts of interest in the management structure. Danaos pays companies owned by the Coustas family to operate its ships.
Danaos’s market cap is $1.6 billion, and it has $650 million of debt. LTM earnings are $560 million, so it trades at a 2.9x P/E. The company has been buying back shares and paying dividends since 2020. Share count is down about 15% since then.
Stocks don’t usually trade at 3x earnings unless the market thinks those earnings are unsustainable. Danaos has benefitted from elevated shipping rates since the Houthis began attacking ships in the Red Sea. That has forced ships bound for the Suez Canal to re-route around the Cape Of Good Hope. This is a longer journey and ties up each ship for longer, effectively reducing the capacity and availability of ships and driving up prices.
A similar dynamic happened to auto dealers in the US during the pandemic. A dearth of supply of new cars combined with elevated demand allowed dealers to raise prices and earn super-normal profits. Auto dealer stocks traded at low multiples because the market knew the extraordinary profits were temporary. Profits are sliding, but are still elevated, and they’ve lasted a lot longer than most predicted. It’s been a boon to dealer’s stock prices, as they were able to repurchase a huge amount of shares at low multiples.
Ships are a lot more capital intensive than auto dealers, so there there’s less conversion from net income to free cash flow. Danaos also seems to be growth minded, having tripled its container capacity since its 2006 IPO. The company is still chipping away at its share count, though not as dramatically as I’d like to see given the valuation. It’s no AutoNation.
In September Pabrai spoke briefly about his thesis on Danaos:
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