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Can Tanker Stocks Stay Afloat?
It's tempting to eschew the maritime puns, but the reality is dry bulk shipping companies have had to sail some rocky seas in 2010. As the materials sector has lost some luster, shipping companies that transport coal, copper, iron ore and related fare have been punished as demand for their services has tumbled. Concerns over China's economic growth, which looms large over commodities-related stocks, has also been another issue for dry bulk shippers and tanker companies to contend with.
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Of course, we cannot forget to mention that many dry bulk and tanker firms are based in Greece and that is not a brush any company wants to be painted with this year. All of these factors have been sloshed around in Wall Street's blender, creating a rather toxic cocktail for investors, who are seeing low price tags on many of these stocks. Worst of all, many investors are confusing these cheap prices with actual value.
Before jumping into shipping stocks, investors should take a look at the Baltic Dry Index, which entered the mainstream financial lexicon at the height of the commodities bubble and was mentioned on an almost daily basis by CNBC during the financial crisis. You can't invest in the index, a widely followed indicator used to track daily shipping rates, but it should be noted that through Friday July 9, the Baltic Dry Index had fallen for 30 straight days. (Learn more about this indicator, in The Baltic Dry Index: Evaluating An Economic Recovery.)
For those who are feeling adventurous or nostalgic for nautical stocks, let's take a look at few ways to get involved with shipping stocks.
Nordic American Not Too Bad
Nordic American Tanker (NYSE:NAT) has been one of the steadier names among shipping stocks, but this scenario is more a case of it being less bad than it is an example of strong outperformance. To be sure, there is some allure with Nordic American, namely a yield of 8.6%. The company has boosted the size of its fleet to 20 vessels from 14 since last year and said it will not need to issue new shares to purchase new ships.
In the shipping sector, a company that does not need to do a secondary share offering has a certain amount of appeal after so many of these companies diluted shareholders during the financial crisis. Even better, Nordic American says that its dividend is safe, although it should be noted the company pared its payout twice last year.
One pundit recently went so far as to say that Nordic American is one of 10 stocks that are worse than BP (NYSE:BP). That might be a stretch, but with the Baltic Dry Index tumbling, it might be difficult to embrace Nordic American because the yield may not act as sufficient buffer against capital depreciation.
A Safe Bet?
Safe Bulkers (NYSE:SB) is a shipping name that doesn't attract a lot of headlines compared to some of the bigger names in this universe, but that isn't a reason to run away from this stock. With a market cap of less than $500 million, Greece-based Safe Bulkers is a small-cap stock by definition, but that could be a source of attraction in a bull market because small caps tend to outperform following recessions.
The stock has a return on equity of 536.4% over the past year, the best ROE among small-caps and somehow, the stock is up 4% in the past month while the Baltic Dry Index has been plummeting. Trading for less than $8 and at 4.47 times forward earnings, Safe Bulkers could be a safe, inexpensive way to get some shipping exposure while harvesting a yield of more than 8%.
Back Again
If you're so inclined, there's an ETF that tracks the shipping industry, the Claymore/Delta Global Shipping ETF (NYSE:SEA). SEA took a little break due to some procedural issues related to Guggenheim Partners' acquisition of Claymore, but the new version of SEA tracks the same index as the old version.
The new SEA reappeared on June 11 and has decent daily volume of 84,000 shares and has accumulated over $130 million in assets, a great haul in a short amount of time. The risk with SEA lies in the fact that it allocates almost 19% of its holdings to Greek equities, walking investors right into the lion's den of the world's worst-performing stock market in 2010.
Keep in mind that being long SEA means embracing 30 shipping stocks at a time when embracing just one of these names could be risky; if you can't pick just one shipping stock, then SEA is the ETF for you.
Bottom Line: Sail Away, At Least For Now
With fears of a double-dip recession growing stronger, sailing away from the shipping sector might be the best course of action in the current market environment. So, until the global economy shows signs of being completely out of the woods, avoid SEA. Safe Bulkers might be a OK for a small position. After all, that 8% yield is better than what you'd get with a money market or CD.
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
IN PICTURES: 20 Tools For Building Up Your Portfolio
Of course, we cannot forget to mention that many dry bulk and tanker firms are based in Greece and that is not a brush any company wants to be painted with this year. All of these factors have been sloshed around in Wall Street's blender, creating a rather toxic cocktail for investors, who are seeing low price tags on many of these stocks. Worst of all, many investors are confusing these cheap prices with actual value.
Before jumping into shipping stocks, investors should take a look at the Baltic Dry Index, which entered the mainstream financial lexicon at the height of the commodities bubble and was mentioned on an almost daily basis by CNBC during the financial crisis. You can't invest in the index, a widely followed indicator used to track daily shipping rates, but it should be noted that through Friday July 9, the Baltic Dry Index had fallen for 30 straight days. (Learn more about this indicator, in The Baltic Dry Index: Evaluating An Economic Recovery.)
For those who are feeling adventurous or nostalgic for nautical stocks, let's take a look at few ways to get involved with shipping stocks.
Nordic American Not Too Bad
Nordic American Tanker (NYSE:NAT) has been one of the steadier names among shipping stocks, but this scenario is more a case of it being less bad than it is an example of strong outperformance. To be sure, there is some allure with Nordic American, namely a yield of 8.6%. The company has boosted the size of its fleet to 20 vessels from 14 since last year and said it will not need to issue new shares to purchase new ships.
In the shipping sector, a company that does not need to do a secondary share offering has a certain amount of appeal after so many of these companies diluted shareholders during the financial crisis. Even better, Nordic American says that its dividend is safe, although it should be noted the company pared its payout twice last year.
A Safe Bet?
Safe Bulkers (NYSE:SB) is a shipping name that doesn't attract a lot of headlines compared to some of the bigger names in this universe, but that isn't a reason to run away from this stock. With a market cap of less than $500 million, Greece-based Safe Bulkers is a small-cap stock by definition, but that could be a source of attraction in a bull market because small caps tend to outperform following recessions.
The stock has a return on equity of 536.4% over the past year, the best ROE among small-caps and somehow, the stock is up 4% in the past month while the Baltic Dry Index has been plummeting. Trading for less than $8 and at 4.47 times forward earnings, Safe Bulkers could be a safe, inexpensive way to get some shipping exposure while harvesting a yield of more than 8%.
Back Again
If you're so inclined, there's an ETF that tracks the shipping industry, the Claymore/Delta Global Shipping ETF (NYSE:SEA). SEA took a little break due to some procedural issues related to Guggenheim Partners' acquisition of Claymore, but the new version of SEA tracks the same index as the old version.
The new SEA reappeared on June 11 and has decent daily volume of 84,000 shares and has accumulated over $130 million in assets, a great haul in a short amount of time. The risk with SEA lies in the fact that it allocates almost 19% of its holdings to Greek equities, walking investors right into the lion's den of the world's worst-performing stock market in 2010.
Keep in mind that being long SEA means embracing 30 shipping stocks at a time when embracing just one of these names could be risky; if you can't pick just one shipping stock, then SEA is the ETF for you.
Bottom Line: Sail Away, At Least For Now
With fears of a double-dip recession growing stronger, sailing away from the shipping sector might be the best course of action in the current market environment. So, until the global economy shows signs of being completely out of the woods, avoid SEA. Safe Bulkers might be a OK for a small position. After all, that 8% yield is better than what you'd get with a money market or CD.
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
by
Todd Shriber
Todd Shriber was a financial journalist for five years with Bloomberg News and MergerMarket.com, covering a variety of sectors, including energy, financials and technology. He is also a Series 7 license holder and has actively traded equities, forex and options.
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