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Supply Chain Slipup: Why the Shipping Surge Still Has Legs

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We’ve heard a common sentiment echoed from mega-bank CEOs, discount retail chiefs, and even members of the Fed regarding the current macroeconomic environment. Inflation is going to linger and the supply chain woes that have been plaguing the globe aren’t going to magically disappear. Just like the issues that led to our current predicament built up over the span of years, the solutions that spur a tightening of demand and a slowdown in the economy will manifest themselves over time.

That’s good news for shipping companies, as they’re able to charge higher rates and pass along the higher costs of doing business. Companies are paying a premium in order to transfer consumer goods, and the foreseeable future for the shipping industry looks bright. The Zacks Transportation – Shipping industry contains 43 companies that stand to benefit.

This industry is currently ranked in the top 13% out of over 250 industry groups. Because it is ranked in the top half of all Zacks Ranked Industries, we expect this group to outperform over the next 3 to 6 months. Digging a bit deeper, the Zacks Transportation – Shipping industry has returned +25.65% this year versus a -20.84% loss for the S&P 500. Despite the massive price run, this group is still relatively undervalued:

Zacks Investment Research
Image Source: Zacks Investment Research

The industry also boasts a high number of Zacks Rank #1 (Strong Buy) and #2 (Buy) stocks, serving as another confirmation signal that the group is experiencing positive earnings revisions. Let’s take a look at one company in particular that is trading near new highs. Simply put – a stock breaking out to new highs on heavy volume is a sign of strength.

Scorpio Tankers Inc. (STNG - Free Report)

Scorpio Tankers is engaged in the seaborne transportation of refined petroleum products via the global shipping markets. STNG boasts a remarkable fleet consisting of more than 120 chartered-in tankers. Its vessels carry petroleum products and crude oil for integrated oil companies, oil traders, and other customers. Scorpio Tankers was incorporated in 2009 and is headquartered in Monaco.

STNG has surpassed earnings estimates in seven of the past nine quarters. The shipping company has delivered a trailing four-quarter average earnings surprise of 12.26%. The stock has responded well and has already advanced nearly 180% this year. It doesn’t appear the run is over, as just yesterday STNG made a new closing high for the year.

StockCharts
Image Source: StockCharts

For the current quarter, analysts have increased their EPS estimates by an astonishing 1,321% in the past 60 days. The Q2 Zacks Consensus Estimate is now $2.32 per share, translating to potential growth of 346.81% relative to the same quarter last year.

What the Zacks Model Reveals

The Zacks Earnings ESP (Expected Surprise Prediction) identifies companies that have recently witnessed positive earnings estimate revision activity. The idea is that this more recent information can serve as a better predictor of the future, giving investors a leg up during earnings season. When combining a Zacks Rank #3 or better with a positive Earnings ESP, stocks produced a positive surprise 70% of the time according to our 10-year backtest.

With an Earnings ESP +11.5% and a Zacks Rank #2 (Buy), another earnings beat may be in the cards for STNG investors.

With the skies clear and the wind at its back, make sure to add STNG to your watchlist. 


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