Near-term Bullish Outlook for Shipping Stocks

The Baltic Dry Index [BDI], published by The Baltic Exchange in London, measures freight rates for different-size dry-bulk ships on global trade routes. It has already increased by 44% since its recent low in late January 2006 (+23% ytd.).

However, it should be noted that shipping rates have been highly volatile in the last 3 1/2 years. Goldman Sachs and Merill Lynch have the same forecast for the BDI: softer prices in 2006 lead to increased scrap rates followed by a steady upturn into 2007 and 2008 (Source : Goldman Sachs Global Investment report, March 22 2006).

Interesting to note that Omar Nokta, a shipping analyst with Dahlman Rose & Co (a leading boutique investment bank specialized in the energy sector, including marine shipping and offshore services, oilfield services, and electric utilities) upgraded some shipping stocks based on stronger than expected tanker rates so far this year on July 15th (Source: Reuters), followed by a second upgrade on July 30rd (Source: TradeWinds), by which Dahlman is setting itself apart from such analysts as Jefferies, which downgraded the sector prior to its recent rates rally, and Bear Stearns, which maintained a "sell" rating on the group only last week.

A look at the market reveals that the Transportation-Shipping Index from Investor's Business Daily has already gained some ground as its Industry Rank [IR] has risen from 137 to 57 in the past 3 months. Last week its IR was actually at 48. The figure below shows a weekly chart of 33 shipping stocks traded on US exchanges -- click to enlarge, and the stocks are listed below:

Alexander & Baldwin (ALEX)
Aries Maritime Transport (RAMS)
Arlington Tankers Ltd (ATB)
B & H Ocean Carriers Ltd (BHO)
Diana Shipping Inc (DSX)
Double Hull Tankers Inc (DHT)
Dryships Inc (DRYS)
Eagle Bulk Shipping Inc (EGLE)
Excel Maritime Carriers (EXM)
Freeseas Inc (FREE)
Frontline Ltd Adr (FRO)
Genco Shipping & Trading (GSTL)
General Maritime Corp (GMR)
Golar Lng Ltd (GLNG)
International Shipholding Corp (ISH)
Knightsbridge Tankers (VLCCF)
M C Shipping Inc (MCX)
Navios Maritime Holdings (BULK)
Nordic Amer Tanker Ship (NAT)
O M I Corp (OMM)
Overseas Shipholding Grp (OSG)
Quintana Maritime Ltd (QMAR)
Seaspan Corporation (SSW)
Ship Finance Intl Ltd (SFL)
Star Maritime Acq Corp (SEA)
Stealthgas Inc (GASS)
Stolt Nielsen S A Adr (SNSA)
T B S International Ltd (TBSI)
Teekay Lng Partners Lp (TGP)
Teekay Shipping Co (TK)
Top Tankers Inc (TOPT)
TORM D/S Adr (TRMD)
Tsakos Energy Navigation (TNP)

The chart clearly reveals that shipping stocks are currently working on a long-term base after their strong up-move between August 2003 and February 2005. The spike of the RS line in the last 4 weeks could be an early indication of a possible up-move like the up-move in October 2005.

This could be a turnaround backed with improving fundamentals. If shipping rates will stay on this high level throughout the rest of the year and increase in the next two years, we will also see an increase in the earnings of shipping stocks.

The surprises to the upside can be even quite high, as the current forecasts for shipping rates would be too low. However, only time will show us if shipping rates will perhaps start to increase a little bit earlier as current opinions suggest.

Disclosure: The author may be long any and all of the stocks mentioned.

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