Zoom Zoom Zim

Sharing one of my favorite stocks from the Model Portfolio that is trading for 2x P/E

The best way to see if you have conviction in an idea is what you do with your cash when the stock dips. Do you keep your cash close in case the stock goes down more? Or do you not hesitate to buy more because you have confidence in your investment thesis?

One of the stocks in the Hidden Rock Capital Model Portfolio that I’ve found myself buying more shares whenever I get a significant dip has been ZIM Integrated Shipping (ZIM), which I first wrote up in February of this year when the stock was trading at $12/share.

Back then, I bought ZIM as a short-term event-driven trade betting on further hostilities in the Red Sea which would drive up container shipping rates. But as I continued to dig in, I saw a hated, misunderstood stock trading for absurdly low valuations.

What began as a fling turned into a longer-term relationship, and I continue to hold ZIM today as a compelling value opportunity, despite it being up almost 100% from my original purchase price.

Source: Yahoo Finance

Here are the 3 reasons I like ZIM stock today, and am willing to continue buying dips:

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#1: Valuation

Sometimes, valuation can be its own catalyst when it is dramatically undervalued enough. I’ve had recent successful experiences purchasing absurdly cheap stock trading for 2-3x earnings/cash flow, most notably Alpha Metallurgical Resources, which I held on as a 75-bagger!

For ZIM, the stock is trading for less than 2 times my estimated 2024 earnings, which makes for an amazing bargain provided the company is not in danger of imminent bankruptcy (which ZIM is not).

Here are the earnings by quarter for 2024 (actual + my own estimates):

• Q1 2024 (actual) = $0.75/share

• Q2 2024 (actual) = $3.08/share

• Q3 2024 (projected) = $3.50 to $4.50/share

• Q4 2024 (projected) = $4 to $5/share

Adding these up gets us to a projected 2024 earnings between $11 and $13/share. So at the current stock price of over $22/share, ZIM is trading around 2 times P/E (slightly lower than 2x P/E if you take the higher end of earnings estimates).

In a stock market hitting record highs almost every week, please tell me another stock that is a viable going concern trading for 2 times earnings! It would be a very short list indeed…

With strong continued shipping rates, there is no imminent financial health threat to ZIM. And the company’s sizable debt is mostly due to container ship leases (which it has been able to pay down using its recent strong cash flows). This also is not too troubling, similar to a retail company reporting higher-than-normal debt levels due to store operating leases, but being simply be viewed as a cost of doing business by most investors.

We must conclude that ZIM is just really cheap. So what are some catalysts that can unlock this deep value and cause the stock to rerate higher?

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#2: Multiple Catalysts

When a stock is trading for 2x P/E, the market is expecting earnings to rapidly decline, and even flip to large losses. This is the only rationale that would make sense when a stock is trading for such a large discount, as otherwise the stock would soon earn more than its market cap.

Given that I believe such pessimistic assumptions are baked into the ZIM stock price currently, the shipping market only has to remain strong for longer than people expect (e.g. into 2025 perhaps) for the stock to beat expectations.

When the Houthis first started attacking ships in the Red Sea end of last year, many people expected the issue to be resolved within months if not weeks.

Fast forward to today, and these attacks have persisted for almost a year now, and seem no closer to stopping as the Middle East conflicts continue to simmer and even widen.

Adding to these geopolitical concerns, the global economy seems to be bouncing back with China announcing massive stimulus and the US economy perhaps pulling off the “No Landing” scenario. All of these factors will drive increased shipping demand, causing shipping rates to remain elevated.

Just this week, MAERSK massively increased guidance for rest of 2024 on the back of the stronger-than-expected shipping rates, and I would expect ZIM to do the same for both Q3 earnings and full-year results for 2024 since they are exposed to these same bullish factors.

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#3: The Shorts

Adding fuel to the fire is the high short interest in ZIM stock - currently around 13%-16% of shares according to public sites such as Seeking Alpha and Market Beat. There may be more updated figures from paid services such as Ortex that I do not subscribe to, but the fact stands that ZIM has an unusually high % of shares sold short.

This could potentially ignite a short squeeze as ZIM continues to defy expectations, particularly as the company has a generous dividend policy of paying out more than 30% of its earnings.

Given my projected earnings estimates for ZIM, we may see a scenario where ZIM announces quarterly dividends of at least $1/share for the remainder of 2024 which would further pressure shorts to cover as they would have to pay up these dividends if they do not.

I don’t like basing my investment thesis solely on the idea of a short squeeze, but when it can complement a compelling deep value inflection story, I definitely appreciate this additional special situations angle.

Putting it together, I continue to like ZIM as a deep value opportunity with upcoming catalysts and a hedge on geopolitical escalations, and would recommend risk-tolerant subscribers to consider buying the stock on major pullbacks.

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Thank you for reading, and for paid subscribers I plan to publish one more paywalled update on the Model Portfolio holdings at the end of this month before converting the Hidden Rock Capital substack to a free public format, as previously announced here.

Thank you for your support!