The Dry Bulk Sector: The Buying Opportunity Is Here, But Not All Are Worthy

by: MTF Investing


Longs and shorts have been at odds on the recovery of the Dry Bulk sector.

The long thesis states that the recovering global economy, coupled with an increase in coal and iron demand, will help to lift rates.

The short thesis states the oversupply of Dry Bulk Ships will keep prices down.

Looking at short interest and performance over the past year helps to identify those companies likely to recover.

While many in the shipping industry have predicted the long awaited rebound would come about soon, most are still waiting on the sidelines without seeing any sustained recovery. The BDI (Baltic Dry Index) has seen some spikes recently, but nothing more than short term spikes.


I have previously written about these companies and the industry, and believe that looking at the historic performance, combined with the short interest, can offer insights and opportunities. With the shipping industry, the long and short thesis revolve around the sustained recovery of shipping rates and a balance in the supply of ships.

The Long Thesis

Those that believe the long thesis follow the camp that the global economy is improving and shipping rates are generally trending upwards. While there have been spikes in the BDI, the general trend has been positive since the winter of 2013, primarily supported by the Capesize rates. The primary driver of these rates has been the demand for iron ore and coal from China.

(Source: Navios Maritime Holdings)

The Short Thesis

While the global economy may be recovering, the short thesis remains that the supply of dry bulk shippers is still too high, and will keep shipping rates low, in spite of an increase in volume.


The shorts would believe that even though the increase in the order book has slowed, the rate of scrapping has also slowed. This keeps the fleet at a level that suppresses the BDI and keeps shipper profits low.


Short Interest

While these competing thesis are fighting to move the industry as a whole, individual companies are likely to move based on their overall fundamentals. A higher short rate would indicate a company is struggling more than another and likely to have a higher risk of default.

(Source: data compiled from

Over the past year, there has been a clear stratification among the companies that I believe separates them. Safe Bulkers, Navios Maritime Holdings, and DryShips have all seen higher returns, while Genco (now bankrupt) and Eagle Bulk Shipping have plummeted.

The Walking Dead

There is no need to beat a dead horse with Eagle Bulk Shipping, Inc. (NASDAQ:EGLE). The company currently faces bankruptcy in an attempt to restructure the current debt load. There have already been several good articles that outline the most likely path for the company based on the previous path that Genco Shipping took (Genco Bankruptcy Ruling Provides Insight Into Value Of Eagle Bulk Shipping Shares, Eagle Bulk Shipping: The Grim Reaper Says You're Next) and I don't intend to rewrite them. The short interest for the company sits at just under 25%, and will likely grow as the path to bankruptcy becomes clearer and more imminent.

The Survivors

Navios Maritime Partners L.P. (NYSE:NMM) has performed well over the past year, and will likely continue to excel as the recovery continues. The market has never taken a large short position in the company and I believe it will continue to grow as the industry improves.

Safe Bulkers, Inc.'s (NYSE:SB) performance over the past year has been positive in spite of the fact that the company has been flat since the beginning of the year. Since last month, the company has seen the short interest pull back from 4% to just under 3%. Not a huge pullback, but then again, the short interest wasn't that high either. The company has 64% of 2014 days open to the spot market, a good balance that will help it take advantage of any improvements in the day rate while still having a predictable income stream.

Navios Maritime Holdings Inc. (NYSE:NM) has continued to do well in spite of the rise and fall of the BDI. While it has been flat since the beginning of the year, I believe the current pullback presents a buying opportunity, although it may continue to go lower before it begins to climb again. Long term, the entire Navios portfolio is a well-run company.

DryShips, Inc. (NASDAQ:DRYS) is a lightning rod for analysts. Either they love it or hate it. Among those that love it, they point to the stake the company has in Ocean Rig UDW Inc. (NASDAQ:ORIG). ORIG has been an anchor for the company and has helped it to weather the low rates. Among those that hate it, they point to how the CEO, George Economou, has generally been unfriendly to investors and diluted shares. However, all the shipping companies have had to dilute shares in order to survive the downturn, and view the dilution as a necessary requirement for survival.


I subscribe to the camp of the long thesis. During the 1Q14 DRYS earnings release, George Economou stated the following:

As far as the broader drybulk and tanker markets are concerned, we are optimistic, expect a sustainable recovery in 2014 and beyond and believe DryShips is well positioned to take advantage of the ensuring recovery in charter rates both in the drybulk and the tanker sector.

While the full recovery hasn't happened yet, I believe that patient investors will be rewarded by buying at these levels.

Disclosure: The author is long DRYS. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.