At The Motley Fool, we poke plenty of fun at Wall Street analysts and their endless cycle of upgrades, downgrades, and "initiating coverage at neutral." So you might think we'd be the last people to give virtual ink to such "news." And we would be -- if that were all we were doing.
But in "This Just In," we don't simply tell you what the analysts said. We'll also show you whether they know what they're talking about. To help, we've enlisted Motley Fool CAPS, our tool for rating stocks and analysts alike. With CAPS, we track the long-term performance of Wall Street's best and brightest -- and its worst and sorriest, too.
And speaking of the best ...
First it was Morgan Stanley that downgraded the shipping stocks. Then, Deutsche Bank stepped in and kicked 'em while they were down. So was anyone really surprised when yesterday, up piped another analyst to warn us that the dry bulk shipping industry is looking kinda leaky? As the Gipper might have said ... "There they go again."
Yesterday, it was Dahlman Rose's turn to play the "they" in that scenario. Noting that dry bulk shipping rates have fallen back to Great Recession levels, Dahlman warned Tuesday that unless dry bulk shippers Eagle Bulk (Nasdaq: EGLE ) , FreeSeas , Genco (NYSE: GNK ) , Paragon (Nasdaq: PRGN ) , and Navios Maritime (NYSE: NM ) get their balance sheets in order, in short order, they're heading for a "credit crunch," full speed ahead.
Then, voting with its feet on the likelihood that will happen, Dahlman proceeded to downgrade all five of 'em.
Sector, overboard!
Predicting that we won't see shipping prices rise to pre-recession levels before 2015 (if then), Dahlman painted a bleak picture of the economics in this industry. Says the analyst, you can rent a dry bulk "Capsize" vessel on the Baltic Exchange today for as little as $5,000. Problem is, it'll cost Eagle, Genco, or any of the others anywhere from $7,000 to $10,000 to operate that same ship.
That's a 40% to 100% negative gross margin, folks. And Dahlman's right -- this doesn't bode well for the shippers. With debt loads close to capsizing, many long-term contracts (at acceptable rates, higher than the current spot rates they can charge) close to expiration, and loan covenants that limit companies' flexibility even further, Dahlman sees default risks rising.
And while some companies are better positioned to weather the storm than others -- the analyst singles out nearly debt-free Diana Shipping (NYSE: DSX ) as having one of the better balance sheets in the industry -- not all companies are so fortunate. Perpetual momentum crowd favorite DryShips (Nasdaq: DRYS ) , for example, currently boasts a debt load more than 70% bigger than its own market cap.
Let's go to the tape
And yet, a Foolish man once pointed out how it's often "darkest before the dawn." Is it at least possible that Dahlman's overreacting to all the bad news today? Actually, I think it is -- in evidence of which, allow me to present Dahlman Rose's own record in the Marine industry, featuring a few of the same companies it's just downgraded to "hold":
|
Companies
|
Dahlman Rating
|
CAPS Rating
(out of 5)
|
Dahlman's Picks
Lagging S&P By
|
| Paragon |
Outperform
|
*****
|
65 points
|
| Genco |
Outperform
|
*****
|
83 points
|
| Eagle Bulk |
Outperform
|
****
|
87 points
|
As you can see, Dahlman's record in the shipping industry leaves a bit to be desired. In fact, out of the 10 companies it's on record endorsing over the past three years, a grand total of two have outperformed the market (the fortuitously named Safe Bulkers, and Seaspan). Problem is, while batting .200 may occasionally cut muster in major league baseball, it's not exactly an enviable record in professional investing. More importantly, I believe Dahlman may be throwing in the towel at exactly the wrong moment on this industry.
Cycles matter
Why? Because shipping is a cyclical industry. It moves up, it moves down -- and the very fact of that up-and-down movement often marks the start of a new cycle. When things are going well in dry bulk shipping, you see, prices are high, and profits flow freely. Very soon, new competitors flood the market in search of those profits -- adding capacity and forcing down profit margins. On the other hand ...
Actually, I'll let Dahlman Rose contradict its own downgrades, and tell you about the other hand itself. Quoting directly from yesterday's downgrades: "We believe current rates in general are unsustainably low and look for a modest rebound by late February, following the conclusion to Chinese New Year holidays and the subsiding of the floods in Queensland." Dahlman refuses to take the next step and call a nadir on the industry, of course, arguing instead that "based on vessel supply and iron ore/coal pricing dynamics, we are not expecting a material improvement."
Foolish takeaway
This, of course, doesn't change the fact that over the long term, the best time to buy a cyclical industry like shipping is precisely when investors begin to doubt a recovery will ever happen. With three high profile analysts having now stood up to downgrade the shippers, I suspect we're nearing that point.
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