Show Some Respect for Shipping Fundamentals

The rise in value of commodities positions is old news by now. Most investors have been able to read the writing on the wall, even if much of it today is in hanzi (Chinese characters). But it isn't all about the commodities themselves ... a commodity isn't worth much unless it can be moved from the source to the end user, and that's why transportation costs are regaining respect as a component of commodities' value.

As raw materials and finished products take to the water in record quantities, the reasonable consequence should be a rise in shipping stock values. We believe this is one of those times investors should listen to reason.

Very quietly, marine indices have been on fire in 2008. The Baltic Dry Index [BDI], which averages Supramax, Panamax and Capsize indices to provide an overall assessment of dry bulk shipping costs, was puttering down around 6,000 in late January. Recently, however, it has snuck all the way back up near the 10,000 mark and looks poised not only to reach last summer's high of 10,700 but to pass it on the run.

The PHLX Marine Shipping Index, an equal weighted average of 17 companies involved in the transport of crude oil, dry goods and agricultural products, has jumped nearly straight up from its March low of 316. At 422, it already has its sights on the 432 high of October 2007 and we believe it could clear that bar with room to spare.

While some of these stocks, such as leading names Dry Ships (DRYS) and Eagle Bulk (EGLE), are arguably a little overbought in the short run, there has been such a convincing string of buy signals in the group that any dip would likely represent a buying opportunity.

And because the dry bulk shippers move such economically-sensitive materials (iron ore, steel, coal, etc.), it should serve as leading 'tell' on an economic slowdown; with record shipping rates within sight, the global recession argument is a tough one to square against this group's fundamentals.

Yes, it's true, the boat has left the dock - these stocks have been on the move in recent weeks - but we believe there's likely still a profitable journey ahead for shipping stocks and that it's not too late to board.

Disclosure: The author's firm serves as portfolio advisor to a UIT containing securities of companies that derive their main source of revenue from maritime shipping of crude oil, dry bulk and container cargo.

www.deltaga.com

Comments

[Trolson:]

Extremely simplistic article. Zero information or interesting analysis, just some misleading points like, for example, regarding correlation between the price of commodities and the price of shipping these commodities. What really matters, is the analysis of supply and demand in shipping, that is the supply and demand of ships, but nothing is mentioned in this regard.

2008 May 08 03:25 PM

[163888:]

Trolson, your nuts the price of commodities is directly linked. It tells what the demand for them is and will be. Hence if the demand for them is strong then the need to get them to the people that need them is strong. It works the other way for weak demand of commodities.

2008 May 08 07:08 PM

[Gold n Stuff:]

Trolson, I read the article: wehre did he say rising commodities prices were causing rising shipping rates? Nowhere. You mis-read it

2008 May 08 07:20 PM

[bulkshipper:]

Zaro says Drys is over bought yet it has the lowest pe of any of the dry bulkers with pe 6.8 - egle pe 26, gnk pe 12, exm pe 10, dsx pe 15 even though it operates on spot (short term) so is in the best position to take advantage of current and raising BDI levels. He should correct this. see previous artilces in alpha on drys.

2008 May 09 12:26 AM

[silver-bullet:]

The price of most bulk shippers or even rail transports are extremely high, along with their sky-high P/Es. I know this is a great way to play commodities - that is if an investor gets in early. For me, I believe I've missed the boat .

Alternatively, I am starting to warm up to Chinese micro-cap stocks for these reasons:

1. Their valuations are extremely low
2. with P/Es more often than not, under 10
3. not to mention the huge trade surplus China currently has with the rest of the world - which implies there'll be lots of spending in this country for the years ahead.

2008 May 09 02:40 AM

[notsosmart:]

happy owner of "FRO" stock for a long time. just luck & the idea that no one has figured out how to pave over the oceans.sorry-no stats,charts or graphs & no connection to this business.

2008 May 09 12:58 PM

[John L.:]

NM and DSX are 2 fairly stable shippers. NM might be the better bet for growth

2008 May 10 08:49 PM

[action jackson:]

Some of the shippers appear to be approaching overbought levels at this time, such as GNK. DRYS was ridiculously oversold and will likely continue to roll, even in the near term, given consideration to its upcoming earnings announcement next week.

2008 May 14 12:20 PM

[163888:]

yea, right action jackson, the last time the dry bulk index was this high, DSX was at 45, DRYS was at 145, and NM was at 18 if the index can stay something close to these levels. You will see how over sold they were.

2008 May 15 08:46 PM

[juggernaut:]

Oversold?,Overbought?


dsx pays a div. of over 10%, egle pays over6% and both have contracfs on 66% of their current and future ships. What's not to like? BUY,BUY,BUY!!!!!!!!!!!...




















who

2008 Jun 07 12:59 AM