Star Bulk, Navios, Eagle Bulk: February Could Be 'Dry,' But 2022 Should Be 'Bulk'

Summary

• Dry bulkers have had a fantastic 2021, and the start of 2022 is continuing that trend. Over the long run, we expect this trend to continue.
• Having said that, it wasn't a straight line across 2021, and the past few months have seen the Baltic Dry Index moving 60% off its peak.
• Traditionally, the start of a calendar year is a challenging period for dry bulkers, and we believe that this year they are facing a particularly greater challenge.
• For that reason, we're not changing anything within our dry bulk mix; however, we focus on playing defense over the next 2.5 months.
• Once February is over, we hope/expect the covered CALLs we sold to expire worthlessly, and then the dry-bulk rally can keep marching on without us stopping it short.
• Looking for a portfolio of ideas like this one? Members of Wheel of Fortune get exclusive access to our model portfolio. Learn More »

Alexey_Lesik/iStock via Getty Images

Please note that this article is based on a few Trading Alerts that were issued on Jan 4, 2021 to Wheel of FORTUNE subscribers.

Everybody Loves Raymond

Do you remember the famous, most successful, sitcom "Everybody Loves Raymond" featuring Raymond Barone, a successful sportswriter who's struggling to balance his family and work life, but at the end (of every episode) is able to find the turn things right with a bright outlook?

Well, "Everybody Loves Raymond" is back, but instead of "Raymond," it's Star Bulk Carriers (NASDAQ:SBLK) everybody seems to love these days.

The latest one to mention the stock was Jenny Harrington (CEO of Gilman Hill Asset Management, LLC) on CNBC (Jan. 3) as part of a discussion around stock picks for 2022.

(By the way, she also likes NYCB (and WU), so I'm starting to suspect she might be a hidden WoF subscriber...)

Anyway, just to make it clear at the very start of this piece: In spite of us selling covered CALLs on various dry bulkers today, we, too, still very much love SBLK, as well as a few dry bulkers, especially the ones we hold, Eagle Bulk Shipping (EGLE) and Navios Maritime Partners L.P. (NYSE:NMM).

Why are we here then?

We're selling all these covered CALLs on all three dry bulkers solely as an opportunistic, tactical, move ahead of February.

Much of what we describe below can be done (in a similar way) with each of the three stocks, however, for the sake of simplicity, we present the thesis using SBLK as a representative for all three names (and for the entire industry for whatever it's worth).

Later on, we're touching upon specific points that are relevant for the other two stocks, and are worthwhile paying attention to.

But for now, let's get back to business, explaining why are we "buying protection," even if we are actually selling something?

First and foremost, recall that we're coming off a very strong year:

We're not saying that 2022 won't continue the trend, but we believe that following such a huge run-up a pause is due.

As a matter of fact, the last three to four months of 2021 had already seen dry-bulkers losing steam (some names a lot of steam), and the returns during the last quarter have been anything but impressive.

Star (of the) Bulk

SBLK was, and remains, the most resilient of them all.

The last two weeks of 2021 were particularly strong, with some of the dry bulkers posting a significant recovery, and 2022 has also started on a strong foot for these stocks.

As of today, SBLK is still looking very strong, just as we expect/wish it to be when we bought it last year.

As a matter of fact, we don't rule out a further (short-term) upside, especially during the early days of a new year that tends to be particularly strong for the stock market as a whole.

Nonetheless, we would be surprised if SBLK can make a new high (>$26) during the first two months of 2022, especially when February 2022 is ahead.

What's so special about February 2022 you're asking?

When Dry Bulk Goes "Dry"

Traditionally, February is seeing many Chinese factories shutting down in honor of the Chinese New Year (Feb. 1). No news about this, however this year there's an extra, special, addition to it.

The XXIV Olympic Winter Games are going to take place in Beijing (Feb. 4-20), and in an attempt to reduce smog it's likely that many (if not most) Chinese factories will shut down during much of February (and perhaps even as early as late January).

This could negatively affect dry-bulk rates, as measured by the Baltic Dry Index ("BDI"), which is trading weaker compared to container indices in recent months.

The BDI has a good representative on the stock exchange in the form of Breakwave Dry Bulk Shipping ETF (BDRY).

The Trend is (not) Your Friend (early in the year)

The below chart is self-explanatory, and it shows the risk of SBLK possibly following the footsteps of (what could be a somewhat weaker) BDRY.

Of course, one may claim that the "early 2022 effect" has already occurred with the BDI losing 60% (!) off its 13-year peak at 5,650 (Oct. 7, 2021).

Perhaps the Chinese factory shutdown 2022 effect has already been accounted for over the past three months?

Surely, that's a valid claim, but even if we accept this, it would still mean that even if dry bulk rates may not fall further, they don't have any reason to spike ahead of late February, at the very earliest.

It's still hard to see how the BDI is making a significant jump when the economy which has the biggest impact on that index is running low.

SBLK - additional important points:

• 25 & 26 strikes are 6% and 10% higher than current market price.
• If both options are assigned the net (selling) price will be nearly $27. Taking into consideration that SBLK has become a large position on Wheel of Fortune, it wouldn't be such a bad idea to let some of it go.
• Let's not forget that SBLK is expected to pay a $1.25 quarterly regular dividend which, based on history, is supposed to have an ex-date prior to the option's expiry date.
• This also means that the stock price would be adjusted down (on ex-date) by more than 5%, without the strike price being adjusted (as is the case with a special dividend).

NMM - additional important points:

• A 30-strike is 14% higher than the current market price.
• If the option is assigned the net (selling) price will be $31.50.
• Unlike SBLK, NMM is trading way off its 52-week high
• NMM is still struggling with a down-trending channel

EGLE - additional important points:

• A 50-strike is 9% higher than the current market price.
• If the option is assigned the net (selling) price will be $53.
• Unlike SBLK, EGLE is trading way off its 52-week high.
• EGLE is likely going to face resistance around/before the $50-mark.

Moving From "Dry" to "Bulk"

Don't get us wrong: We still expect the BDI and dry-bulk stocks to perform well in 2022, with COVID/Omicron lockdowns/shutdowns, port congestion, low inventories (especially post year-end/holiday season), and strong retail demand keep causing/inflating supply-chain disruptions.

However, for the next two months, we feel comfortable to take some cover by selling covered calls on our dry-bulk stocks.

Since this is a tactical move, aiming at providing temporary protection, we use relatively short-dated expiry dates that capture the next 2-3 months, but not more than that.

We have no intention whatsoever limiting the upside potential that we, as well as Wall Street, still see for dry bulkers.

As you can see, price targets have been moving up nicely and steadily across the past year.

So much so that the price targets today have more than doubled (over the past year) for EGLE and SBLK, and more than tripled when it comes to NMM.

Data by YCharts

Analyst’s Disclosure: I/we have a beneficial long position in the shares of SBLK, NMM, EGLE either through stock ownership, options, or other derivatives. 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.