Are Shipping Stocks Ready For A Sea Change?

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Includes: ASC, DHT, DJP, EURN, FRO, MATX, NAP, NAT, NNA, OSGB, SEA, SFL, SPY, TNK
by: Daryl Montgomery

Summary

Shipping stocks have been in a down trend since 2010 and have dropped around 60% on average.

The industry experiences up and down cycles, so contrarians should be paying attention to it.

Shipping stocks still have some of the highest yields in the market and are of interest to dividend investors.

The revival in commodities and industrials that seems to be taking place is bullish for the industry.

Shipping stocks have been on a long down trend since late 2010. They are some of the most beaten-down stocks in the market (although some still retain relatively high dividends, which can go even higher in a recovery). During the recent price decline the industry has undergone consolidation. While individual companies in the industry can go bankrupt (and some have) the industry itself can't, since a large majority of world trade is conducted via ship and this makes its services a necessity. After five long, lean years, shipping stocks may be ready for a turnaround.

The degree of the devastation in stocks in the industry can be seen in the charts below. While the S&P 500 (NYSEARCA:SPY) is up more than 80% since the peak in shipping, shipping stocks themselves (NYSEARCA:SEA) are down almost 60% during the same period. Commodities (NYSEARCA:DJP) are down around 40% and it should be noticed that shipping stocks (in black) and commodities (in blue) tend to trade in a similar fashion and the relationship since the beginning of 2015 has been very close. The S&P 500 is the line in gold.

Shipping Stocks , S&P 500 , and Commodities

SEA vs SPY and DJP 5 yrs Weekly.gif

Shipping stocks should trade like the commodity market, but not necessarily exactly the same. There are three major components to the industry - container, bulk carriers, and tankers. Container ships carry manufactured goods and their performance should be related to the amount of global manufacturing activity. Bulk carriers ship raw materials. Tankers, ship oil, liquefied natural gas, petroleum products, and chemicals. Tanker shipping stocks have had some of the biggest drops as can be seen in the chart below and a few, such as Navios Maritime (NYSE:NNA), DHT Holdings (NYSE:DHT) and Frontline (NYSE:FRO), have performed much worse than the ETF SEA. The black line on the chart below represents SEA, the red line NNA, the blue line DHT and the yellow line FRO.

The Performance of Shipping ETF SEA versus Tanker Stocks

Unlike railroads and trucking, U.S. investors are fortunate to have access to a shipping ETF. SEA replicates the Dow Jones Global Shipping Index. Many of the companies in its portfolio don't trade on the U.S. markets, so it offers American investors exposure that they can't otherwise obtain. The top 10 holdings in SEA represent more than 60% of the total. Diversified Danish company AP Moeller - Maersk A/S by itself is almost 20% of the ETF. Nippon Yusen KK,Cosco Pacific Ltd, Kawasaki Kisen Kaisha Ltd, and Matson (NYSE:MATX) round out the top five. Only Matson trades in the U.S., the others in Japan and Hong Kong. The top 10 also includes Singapore company Sembcorp Marine Ltd, which engages in shipbuilding, conversion, repair and maintenance and Ship Finance Intl Ltd (NYSE:SFL), which owns and operates ships as well as being involved in the purchase and sale of maritime assets.

An important attribute of shipping stocks is that it is common for them to have high dividend yields. Some of these have been cut or even disappeared during the last five years, yet there are still some double digit ones in the industry. Dividends will be more secure during a recovery and in all likelihood even higher. As of this writing, some ship company stocks with annual yields over 10% are: Navios Maritime (NYSE:NAP) - 16.8%, DHT Holdings - 15.2%, Overseas Shipholding Group (NYSEMKT:OSGB) - 15.2%, Teekay Tankers (NYSE:TNK) - 13.6%, Ship Finance Intl - 13.2%, Navios Maritime Acquisition - 12.6%, and Nordic American Tanker (NYSE:NAT) - 12.2%.

Those interested in the commodity markets, should be aware that playing a rebound in oil can be done by purchasing tanker stocks, and in some cases, this will be a more profitable approach. There is no ETF for this group, so individual stocks need to be bought. For a detailed analysis of the tanker stocks mentioned here, plus Ardmore Shipping (NYSE:ASC) and EuroNav (NYSE:EURN), see "The Tanker Industry Could See A Rebound Soon."

Shipping stocks have potential appeal to a number of different classes of investors. The industry has consolidated in the last few years and its stocks have dropped 60% on average - a huge amount for a group of assets that have not been in a bubble. A rebound in the Industrial sector of the economy, which seems to be happening, and commodities, which also seems to be happening, will be bullish for shipping. It's time for contrarian investors to start paying attention to these stocks.

Disclosure: I/we 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.