These 7 Stocks Are Starting to Look Pretty Cheap

Drybulk shippers are a unique sort of company: They transport drybulk commodities like iron ore, coal, grain, and fertilizers. They operate and own massive fleets that typically include the smaller Panamax vessels and then the much larger and widely measured capesize vessels as well.

Drybulkers usually do well when the global economy is on the upswing; the more that trade and global demand increase, the more business these companies do. Fortunately for investors, there's an index that helps track the shipping costs that these businesses demand, and that's the Baltic Dry Index (BDI).

The Baltic Dry Index in 2011
The BDI had been increasing in the years before the financial collapse, as global demand, cheap financing, and massive trade caused drybulkers to borrow on the cheap and order new vessels. However, when the economic collapse occurred in 2008, demand dried up, and the BDI has been on the constant decline ever since.

Recently, the BDI dropped to its lowest point in almost two years. The main reason is that analysts have been alarmed at the massive glut of ships that have been and will continue to flood the drybulk market. Although demand is expected to increase in 2011, supply is expected to outstrip that demand, causing rates that shippers get to drastically decrease.

For instance, in 2009, about 115 capes emerged onto the global scene; in 2010 that number increased to 210, and this year there are at least 200 more expected for delivery. Accordingly, the going charter rate for capes plunged by about 50% on the spot market last week and hit $12,000 a day -- essentially the rate it costs to operate a ship in the first place. Just for context, prices were about $40,000 in November and around $20,000 in early January. This is obviously an enormous blow to the shippers, as they are forced to either sideline ships or sell old ones for scrap.

Making matters worse was the recent flooding in Queensland, Australia, an area that is the source of about half of the world's seaborne coking coal (used to make steel). The flood was the worst in about 50 years and is estimated to cost about $2.3 billion in coal sales.

How cheap have things gotten?
Owners have tried their best to stem the tide flowing out of their industry by either selling ships diversifying their businesses (getting into container ships or deepwater oil drilling). However, the markets have not been kind. Take a look at these seven stocks that have fallen dramatically over the past year and compare them to the broad market:

 

1-Year Price Change

Forward P/E Ratio

S&P 500 17.5% 13.5
Dryships (Nasdaq: DRYS  ) (14.2%) 5.0
Nordic American Tanker Shipping (NYSE: NAT  ) (19.3%) 23.9
Diana Shipping (NYSE: DSX  ) (17.3%) 7.8
Navios Maritime (NYSE: NM  ) (17.7%) 5.0
Eagle Bulk Shipping (Nasdaq: EGLE  ) (9.9%) 22.0
Excel Maritime Carriers (NYSE: EXM  ) (19.5%) 11.9
Genco Shipping & Trading (NYSE: GNK  ) (40.5%) 5.1

Source: Yahoo! Finance.

Some of these companies have definitely held up better than others, but it's clear that across the board, they've all taken beating compared with the S&P 500. Five out of those seven companies are trading below the broad market's P/E ratio and at first glance, look to be dirt cheap. The question is whether all the bad news has already been priced into these stocks, and my answer would tend to be a resounding "yes." Analysts have shunned most of these companies, and short interest as a percentage of float continues to rise; Genco Shipping, for instance, has a shocking short interest of 16%, while Dryships has a short interest of 9%.

The contrarian in me wants to say that now could be the bottom for drybulkers and that today could present a great opportunity to buy in at extraordinarily low prices.

What do you think: Are these drybulkers in for a rough 2011, or is a rebound in sight? Sound off in the comments section below or add these companies to My Watchlist to get the latest analysis and commentary.

Jordan DiPietro owns no shares mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy that's always in view.


Read/Post Comments (9) | Recommend This Article (22)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 24, 2011, at 5:06 PM, Investor89 wrote:

    It's not cheap. The companies are losing money right now (forward P/E is bullcrap) and most of them are highly leveraged. They are expensive! You buy this stock, you rely on luck, and chance. Warren Buffet wouldn't buy it in a million years.

    GNK needs about $ 17,000 Per ship per day on a cash basis to cover pricipal&interest on its loans and all other expenses (except depr. which is huge). That's not $12000

    Shippers won't sell their ships for scrap; they would have to accept huge book losses which they won't.

  • Report this Comment On January 24, 2011, at 8:23 PM, cheap2chuck wrote:

    This is the time to dive in. However, one needs to look for those companies that have most of their ships under charter. Drys for example, has 80% of their ships under charter for 2011 at a very handsome average daily rate of $37,000 per day. Not bad for a $5.00 stock. In addition, three of their drill ships are under contract also bringing in a bucket of $$$'s.

  • Report this Comment On January 24, 2011, at 8:51 PM, DonkeyJunk wrote:

    Ditto Investor89. There are a glut of ships coming out of the drydocks and contracts are not paying enough to cover the day-to-day costs of maintaining large ships.

    Bought into NM a few months ago and plan on keeping it for the dividend until shipping picks up again.

    Shipping will recover, but probably not anytime soon.

  • Report this Comment On January 25, 2011, at 7:07 AM, russellb73 wrote:

    Really should take a look at VLCCF, oil tanker all ships double hulled (so won't have to upgrade due to new environmental reg.'s), 8-9% dividend (with reasonable payout ratio), and less debt than a lot of other tankers.

    Long VLCCF

  • Report this Comment On January 25, 2011, at 1:33 PM, ParisHgtsBruce wrote:

    Warning Will Robinson Warning...Korea Lines a major bulk ship lessor is going into bankruptcy. Most dry bulk shippers with contracts especially Eagle are going to lose a bundle. There is a glut of dry ships out there looking for charters and with cancellations by Korea Lines here come some more.

  • Report this Comment On January 25, 2011, at 4:56 PM, JSniden wrote:

    I wonder if Ralph V. Whitworth is aware of this. I remember back in August when a slight change came about when the news broke out that Calstrs and Relational Investors were putting together a proxy fight that aimed at changing O.P.'s compensation policies (well, specifically Ray R. Irani)...http://dealbook.blogs.nytimes.com/2010/08/02/occidental-shar...

  • Report this Comment On January 25, 2011, at 5:30 PM, Investor89 wrote:

    @ DonkeyJunk

    That's not how investing works. They can cut the dividend or stop paying one. You took a 6.0% hit today which wasn't neccesary. You could have sold it this morning and buy it back at the end of the day. You could have pocketed your dividend and then some. Don't be fooled by 5 stars, they mean nothing, except that a lot of fools love the stock.

  • Report this Comment On January 28, 2011, at 3:17 PM, living2trade wrote:

    Shipping stocks are not finding any love, right now. So, if you are a investor this is the right time to start looking for good investments and build a position for longer term. I like stocks that pay good dividends and are stable, so I get paid to wait for the industry to recover. Consider VLCCF NMM and SB. Also, TPG and SFL. Most trade in a defined channel so you can trade around your core position selling at top and buying at bottom of the channel...

    Others like DRYS, EXL or GNK can then find a small place alongside these stable players, and give you a free lotto ticket when the short squeeze kicks in. You can play both sides and enjoy the ride!

  • Report this Comment On February 14, 2011, at 9:38 AM, Royzo wrote:

    To those of you who like Knightsbridge (VLCCF), I have been in and out of it for years with great results. The shipping arena is notoriously volatile and cyclical, so that's why the gaps of positions. The company is simply admirably run by its CEO, Ola Lorentzen. I believe they have fewer than 10 employees running their Bermuda headquarters. You can't ask for a company to be run more transparently. Go to their web site and look at the record of dividends over more than 10 years. The dividend amounts can be highly variable. I recall a time years ago when I got over $6 in a year when the stock was under $20. Lately they have had a run of $0.25 quarters. There are lots of new tankers coming on line. When VLCCF dips below $15 again, I will go back in, confident that Mr Lorentzen will make it worth my while.

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 1427863, ~/Articles/ArticleHandler.aspx, 9/30/2014 2:07:21 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement