Will Shipping Stocks Sail In 2010?

By Sham Gad | January 07, 2010 AAA

It often pays to be a contrarian when making investment decisions. Looking at investing in areas most others are abandoning can often lead to very rewarding investment candidates. After a terrible 2008, shares in dry bulk shipping stocks began to look cheap. As we look back on 2009, shares have not participated in the rally to the extent that others have.

IN PICTURES: Eight Ways To Survive A Market Downturn

What's Wrong, Mr. Market?
The biggest irony for the shipping names is that last year's rally has benefited speculative names more than quality. Just look at a company like Sanmina-SCI (Nasdaq:SANM), a supplier of electronic services that's loaded with debt and has lost money for the past couple of years. By mid-December, shares had appreciated by over 150%, far out pacing many profitable businesses. Similarly, shares in dry bulk shippers were pounded in 2008 as shipping rates plunged by over 90% from peak to bottom. And despite the fact that some shippers reported a few quarterly losses, they at least were tied to the overall performance in the economy, as well as commodity prices. Despite this, most shippers have had a very lackluster year with regards to share price performance.

What Happened
In short, despite the rise in commodity prices in 2009, shipping rates did not respond accordingly. Sure, the Baltic Dry Index, the industry standard for shipping rates, has moved up, but that alone wasn't enough to convince investors. Over the past years, when shippers were highly profitable, they all went on an expansion spree. Shipping executives were convinced that China's insatiable appetite for commodities would keep them afloat, even during the recession. Now we know they were wrong. The result was a lot of excess capacity, in addition to an immediate need to increase liquidity in order to make debt payments and, in some cases, make the dividend payments that were keeping shareholders involved. The perfect storm hit as shippers had to issue equity, eliminate dividends and adjust credit terms just to stay afloat. Investors jumped ship and didn't come back in 2009. (For more, see The Baltic Dry Index: Evaluating An Economic Recovery.)

That may mean a possible rebound in 2010, if shipping rates continue to head upward. That would especially be good for DryShips (Nasdaq:DRYS), which has a lot of exposure to the spot market. The flipside, of course, is that if rates stay the same or head south, DryShips hurts more than names like Eagle Bulk (Nasdaq:EGLE), which contracts nearly all of its ships out on multi-year time charter contracts. Investors may wish to consider both of these names to play both scenarios. Rising rates may benefit DryShips shares more, but declining or stagnant rates may benefit Eagle more. Euroseas (Nasdaq:ESEA) is a smaller player with less than 20 ships, but it also has one of the best balance sheets.

The Bottom Line
The stock price appreciation could be huge in 2010 for shipping stocks, if the investor community starts to turn favorable on the industry. But for that to happen, the fundamentals must continue to show signs of improving. If not, 2010 may be a repeat of 2009.

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