InvestorPlace columnist Brenden Rearick recently discussed Castor Maritime’s (NASDAQ:CTRM) first profitable quarter since 2019. Interestingly, despite the positive results, CTRM stock fell on the news.
Rearick points out that the company is ready to take advantage of the “strong demand for dry bulk transportation services” with 18 dry bulk carriers and eight tankers at its disposal.
It’s clear, however, that the profitable quarter did little to persuade more investors to come aboard.
I know the reasons why that was the case.
The Valuation of CTRM Stock
The last time I wrote about Castor was in late April, before its 1-for-10 reverse stock split, which the company completed on May 28. It now has 89.96 million shares outstanding, with another 19.23 million potential shares from the exercise of warrants.
The shares closed yesterday at $3.44, giving them a market capitalization of $318.5 million. That’s 19 times the company’s trailing 12-month sales of $16.74 million. Star Bulk Carriers (NASDAQ:SBLK), which owns 128 bulk carriers of varying sizes, trades at 2.72 times its trailing 12-month sales.
So what is it about Castor that’s got investors hot and bothered? Is it the fact that it’s the new kid on the block, promising lots of growth?
The Reddit crowd seems to believe that every stock that has a great deal of short interest is a good candidate to be squeezed. But, if anything, Castor’s $1 million Q1 profit suggests there is little to gain by shorting it.
“$CTRM 90mil float and they are running out of share to short. Cost to borrow has jumped from 2.80 to 3.99 in few days!!!! See you guys on top🚀🌋👋🏻👋🏻👋🏻”
That message was posted by DD,” u/Maybevegas17 on Reddit on June 9.
Look, there’s a difference between a stock that’s worth shorting and a terrible stock. Castor is in the latter category.
Its business plan is unoriginal and supported by low interest rates. Without low rates, it wouldn’t have a business. Would you invest in Castor if the typical business loan carried an interest rate of 10%?
Not a chance. You would go with Star Bulk 100% of the time.
Why Star Bulk?
A Zacks Equity Research article appeared on InvestorPlace in August 2018 with the headline, 5 Stocks With Amazingly High Profitability to Own Now. One of the names was Star Bulk. It had an average positive earnings surprise of 19.5% over the previous four quarters.
It’s gained 68% since then, but SBLK stock is still a long way from its heyday in 2007 when it traded for more than $1,000 per share.
The shipping industry has been through a lot of rough years. Yet Star Bulk’s operating profit over the 12 months that ended in March was $120 million, while it had $730 million of sales and an operating margin of 16.4% during that period. Castor’s operating margin for the same 12 months was 8.1%, based on $1.36 million of operating income and revenue of $16.74 million
The Reddit fans will argue that Castor Maritimes’ margins are climbing, so it’s only a matter of time before it generates more than $1 million per month of operating profits.
Maybe. Or maybe this is as good as it gets for Castor.
In Castor’s most recent reported quarter, its daily time charter equivalent (TCE) was $12,416, while its daily vessel operating expenses were $5,265 for a gross margin of 58% or $7,151. Subtract general and administrative expenses, management fees to related parties, and depreciation/amortization, and you, more or less, get its operating income.
In Q1, Star Bulk’s operating profit was $48.4 million on $200.5 million of sales for an operating margin of 24.1%. The latter figure was 2.7 percentage points higher than Castor’s operating margin.
As for average daily TCE, Star Bulk’s was $15,461 in Q1 2021, more than $3,000 higher than Castor’s, while Star Bulk’s gross margin was 71%. Its fleet utilization — available days divided by ownership days — was 94% during the quarter, one percentage point less than Castor’s.
However, Star Bulk made more money per vessel than Castor.
The Bottom Line
If you look at both stocks’ performance in 2021 and over the past year, SBLK stock has performed better. That, to me, makes sense.
It is a better company than Castor with a more reasonable valuation despite its run over the past few years.
So if you think dry bulk shipping will continue to rebound, SBLK stock, not Castor, is the obvious buy.
It’s that simple.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.