2011 Performance Review For 7 High Risk Shippers

by: Zvi Bar

After several quarters of market underperformance, 2011 will likely go down as one of the worst years for shipping. Barring some short-term periods, several shippers have fallen by a considerable level compared to this time last year, with some shipping equity depreciating over 80 percent.

This year was really divided in half. The first half of the year was poor for shippers, with many shippers falling as much as 50 percent, with a fairly smooth rate of decline. During the summer, though, when global economic concerns came to the forefront, these shippers largely suffered a sharp downward spike. Since that spike-down, shippers became and remained considerably more volatile, but still maintained their prior relative trajectory downward. See the 2011-to-date chart for 7 high-beta shippers [DryShips (DRYS), Eagle Bulk Shipping (EGLE), Excel Maritime Carriers (EXM), Genco Shipping (GNK), Navios Maritime Holdings (NM), Overseas Shipholding (OSG) and Paragon Shipping (PRGN)] below.

Click to enlarge
(Click to enlarge)

Many issues could affect shipping, including potential European failures, Asian recessions and further Middle-East instability, among domestic and other risks. Risks combine with concern for the significant shipping overcapacity existing due to largely unwanted fleet expansions made in the late mid-2000s.

Shipping suffered significant demand reductions and fleet increases just as the financial crisis began. Many shippers expanded fleets prior to the crisis. Shipping volumes have since declined and then stabilized, so far at least. The industry is left with the present overcapacity and concern over future demand, coupled with fears of a brewing global economic crisis.

Below are the 1-month, 6-month and 2011-to-date share performances for the above-reference high beta shippers. Click to enlarge
(Click to enlarge)

Much of this overcapacity development was leveraged, leaving several competitors with problematic levels of debt and an aging, relatively unused fleet. This business cycle is common and usually results in some companies failing while others survive, stronger and/or with greater market share.

The survivors are still unknown, which creates uncertainty and potentially undervalued equities. In the last month, some of the shippers appreciated, which could indicate some investors have are beginning to place larger investments behind those shippers they believe are short-term oversold or likely to survive any coming further global economic weakness.

Nonetheless, the recent broad concerns over global growth and demand highlight the concerns and issues that have plagued the shippers, and bad news domestically, from Europe or Asia could bode poorly for this industry. Alternatively, stability and/or growth will bode well for these shippers.

These companies offer significant risk and potential returns. Their ownership should be limited, though exposure to shipping and transportation is generally considered appropriate in a broadly allocated portfolio.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. This article is intended to be informative and should not be construed as personalized advice as it does not take into account your specific situation or objectives.