Why These Dry Shipping Stocks Are Exploding Upwards

by: The Specialist

The last two days of last week, most dry shipping stocks shot up like a rocket. Names such as DryShips (NASDAQ:DRYS) rallied 12.9%, Navios Maritime Partners (NYSE:NMM) rallied 9.4%, Genco Shipping & Trading Limited (NYSE:GNK) is down 20.9%, Diana Shipping (NYSE:DSX) rallied 3.0%, and Eagle Bulk Shipping (NASDAQ:EGLE) is down 12.4%, and Safe Bulkers (NYSE:SB) rallied 5.2%. For many of these names, especially Dryships, Navios Maritime Partners, and Genco Shipping & Trading, this was the best two-day rally in weeks.

DryShips and Genco Shipping & Trading both rallied the more than the others. Both are set to report the results of their earnings and outlook this week. Speculation is prevalent that both earnings and outlook will be quite positive and for good reason. Navios Maritime Partners reported its earnings last week which helped parked the industry-wide rally. Though its results weren't much of a surprise, its outlook and details of the industry were more than positive. It announced it plans to potentially keep its dividend and raise it through the end of 2014 at a minimum as it sees continually improving fundamentals in the industry. Key takeaways from its conference call include:

As we said last quarter our view is that the drybulk environment has brightened significantly.

On the supply side a shrinking order book is beginning to positively influence the market. Supply of vessel is expected to be reduced in the fourth quarter of 2013 and more attractive reduction in 2014 and 2015 is enhanced. Scrapping continues to be a major factor in our supply demand gap and projected scrapping for 2013 will be probably the second highest historically.

I want to point out that despite the recent rally, levels remained at well below historical averages. During Q4 a slowing trend in the fleet growth along with significant additional iron ore export capacity in both Brazil and Australia should support earnings especially in the Capesize sector. Both the Panamax and Supramax sectors should receive support over the medium to long-term by Chinese coal and grain imports. A further slowdown in deliveries combined with the gradual recovery in the world economy should bode well for improving fundamentals in 2014 and beyond.

If DryShips and Genco Shipping & Trading have similarly positive things to say about the industry in their earnings and conference calls, it could spark a continued rally for all dry shippers. Dry shippers rise and fall mostly from industry trends. Genco Shipping's entire fleet operates based on the daily spot price so a strengthening shipping environment will immediately be to its benefit. DryShips is in a similar situation though it has a large number of its Capesize ships still under fixed-rate contract. When it comes time to renew or secure new contracts, the better the outlook the better the position DryShips will be in to negotiate more lucrative contracts.

At the same time Navios Maritime Partners was reporting its results, the daily spot rates for Capesize ships was having a coincidence rally of its own. Capesize ship rates have been beaten up badly since hitting a peak on September 25 of $42,511 per day. Rates for this biggest ship hit a bottom of $16,005 just before the Navios report. This was the first time the Capesize rate was below the year-ago period in many months, sparking panic and concern among investors that it was headed even lower. Instead, Capesize rates had a its first two-day rally in what seemed like forever, rising 12.3% to $17,798, once again comfortably above the year-ago period and ending panic of a continued decline at least for the moment. Panamax rates held still at strong levels of $13,031, more than double the year-ago period. Surpramax rates hit a new 2013 high of $13,307.

As always, follow the rates first and foremost when following the stocks of this industry. And, of course, pay close attention to the earnings and outlook from DryShips and Genco Shipping & Trading as they each report later this week.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.