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How to Profit from the Shipping Industry Shakeout

Dec. 09, 2011 3:50 PM ETSHIP
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It’s been a rough year for shipping stocks as the combination of continued economic turmoil, a glut of new ships entering an already crowded marketplace, and depressed charter rates scared investors away in droves. The market’s edginess toward shipping stocks was recently highlighted by the selloff that occurred when tanker operator Frontline Ltd. (NYSE: FRO) announced that it could run out of cash next year. Shares of FRO plunged 41% on the news, and other shipping stocks tumbled as well (FRO has since announced a corporate restructuring).

However, within the chaos comes opportunity. Due to the turmoil in the sector, much of the supply that was projected to come online has been scrapped. Ship owners are also demolishing older vessels at a brisk pace: So far this year, the level of scrapping activity in the dry bulk segment is up 400% compared to 2010. Unless shipyards go on a building spree in the months ahead—highly unlikely, given the current industry climate—charter rates could start rising again.

The ongoing industry shakeout is healthy, eliminating the weak while the strong survive. Several shipping companies have filed for bankruptcy this year, with General Maritime Corp. (Pink Sheets: GMRRQ) being the latest casualty. Over the long run the shakeout could alleviate the oversupply problem that is holding down charter rates.

The Baltic Dry Index, a measure of shipping rates for dry goods, has been averaging up in recent months. Several factors are expected to increase the need for overseas shipping in 2013, including: large mining projects coming online in 2013 in Africa, Australia and elsewhere; China’s plan to increase its overseas iron ore reserves; and the growing global demand for coal and agricultural commodities. While 2012 is expected to be another challenging year for the shipping industry, if global demand picks up in 2013 and beyond, those who buy the right shipping stock now could profit substantially.

One of the best value opportunities available in the space right now is Seanergy Maritime Holdings Corp. (NASDAQ: SHIP), an Athens-based shipping company that operates 20 dry bulk carriers. Unlike other companies in the industry, SHIP has managed to remain consistently profitable and has grown revenues year-over-year. The Handysize segment, in which SHIP owns and operates nine vessels, has favorable supply-demand dynamics because it does not face the same oversupply issues as the rest of the industry. SHIP also has access to the lucrative Asian shipping markets through its established operations in Hong Kong. The Company has already locked in 70% of its fleet’s operating days for 2012, and 24% for 2013.

The market has gone overboard in discounting the future prospects of shipping companies. With the industry close to the bottom of the cycle, now is the time for you to start looking at well-managed shipping companies trading at rock-bottom prices. To learn more about SHIP, view the Company’s presentation from our recent Small-Cap New York Conference.

Disclosure: The subject security is a client of RedChip Companies, Inc. RedChip Companies, Inc., employees and affiliates may maintain positions and affect transactions in the securities or options of the issuers mentioned herein. For full financial disclosures for all RedChip clients, please visit http://www.redchip.com/disclosures.asp?src=rcv.

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