A Strong 2012 Start For Shippers May Indicate The Industry Has Finally Bottomed

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 |  Includes: DRYS, EGLE, EXM, GNK, NM, OSGB, PRGN
by: Zvi Bar

2011 will likely go down as one of the worst years for the shippers. Several shippers fell by as much as 80 percent. Shipping has become and remained one of the most volatile industries. Most shippers are high beta, and the group was sensitive to the global downturn.

So far in 2012, several of the shippers have outperformed the broader market. Along with financials, Homebuilders and homebuilding material makers, the shipping industry has been one of the best performing industries over the last two weeks.

Below are equity performance review statistics for seven publicly traded, high beta, low price shippers: DryShips (NASDAQ:DRYS), Eagle Bulk Shipping (NASDAQ:EGLE), Excel Maritime Carriers (NYSE:EXM), Genco Shipping (NYSE:GNK), Navios Maritime Holdings (NYSE:NM), Overseas Shipholding (NYSEMKT:OSG) and Paragon Shipping (NASDAQ:PRGN). I have included their 2-week, 1-month and 6-month share performances, as well as how far down each now trades from its 52-week high.

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Many issues could affect shipping, including potential continued European Union problems, Asian recessions and further Middle-East instability, as well as domestic and other risks. These all combine with concern over 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, with many ship orders being received after the crisis. Shipping volume has since declined and then stabilized. The industry is left with the present overcapacity and concern over future demand, coupled with fears of a brewing global economic crisis.

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.

In the last two weeks, six of these seven shippers appreciated at least 12 percent, which could indicate some investors are beginning to place larger investments behind these shippers, believing they are short-term oversold, likely to survive any coming further global economic weakness, or potentially going to benefit from future growth.

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.

Disclaimer: 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.