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Tickers in this Article: EGLE, DRYS, GNK, EXM, DSX
Despite the rather jubilant market performance we are experiencing so far this year, the shipping industry has remained in stormy waters throughout most of the year. It just goes to show that the old saying "a rising tide lifts all boats" may not be so. Coming into December 2009, many shipping stocks that looked statistically cheap from a value basis proved to be nothing more than classic value traps. (Learn more about value traps at Value Traps: Bargain Hunters Beware!)

IN PICTURES: 8 Ways To Survive A Market Downturn

Nothing to Rely On
Consider dry-bulk shipper DryShips (Nasdaq:DRYS). Shares were around $6.30 heading into December, off nearly 50% for the year. Two years ago, its shares commanded a price tag of over $100, as the company managed more than $13 per share in earnings. Earlier this year, bargain hunters could look at the company's current share price and historical earnings and come up with an analysis that it was cheap, even if it managed to earn one-fifth of peak earnings. Even at the time, the share price was drastically below book value. Patience, it seemed, would be very rewarding.

More Than Numbers
However, upon closer examination, one could see that industry fundamentals were deteriorating. When times were good, many dry-bulk shippers inked deals for more and more ships. Confident in China's insatiable appetite for commodities, shipping rates soared and companies placed massive orders for new builds. Unfortunately, when the economy crashed, shipping rates tanked by over 90% from top to bottom. Not only were existing ships left idle, but many companies had to contend with new build order contracts.

The ultimate result was cancellations, credit amendments to refinance debt and new equity issuance to raise capital. These events occurred at the worst possible time, with debt markets frozen and equity prices tanked. Quality names like Eagle Bulk Shipping (Nasdaq:EGLE) and others like Diana Shipping (NYSE:DSX), Genco Shipping & Trading (NYSE:GNK) and Excel Maritime Carriers (NYSE:EXM), which were paying high yields to attract investors, all had to suspend payouts for one reason or another. DryShips has seen the number of its outstanding shares double over the past two years as a result of equity issuances to raise liquidity. That, along with asset write-downs, rendered any book value reliance useless.

In short, the industry's fundamentals continued to crumble.

Bottom Line
In the case of shipping stocks, the lesson learned so far this year is that which looks cheap certainly can get cheaper. Even more so, the absence of any favorable outlook by the investment community plays a role in stock price valuation.

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