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Playing the Contrarian: Why Genco Shipping May Be a Buy

As the stock markets continue their ascent toward new 52-week highs, I can't help but notice the few dozen stocks not participating in this rally. Many have valid reasons to trade at new 52-week lows. American Superconductor (Nasdaq: AMSC  ) shares imploded yesterday after news broke that its largest client, Sinovel, refused contracted shipments, signaling serious problems for the company moving forward.

But for other companies in this underperforming group, their long downturns may be overdone. I've found one stock in particular that may be too much of a bargain to pass up.

About eight months ago, there was no way I'd touch Genco Shipping (NYSE: GNK  ) with a 10-foot pole. It's amazing how much a year has changed my perception of the company.

Genco's stock has been pummeled, frankly. The company, which leases dry bulk shipping vessels, has been buried under the weight of falling dry bulk rates and increased competition. The tragedy that unfolded in Japan also did little to help Genco, which relies on Japanese imports to drive shipping contracts.

So what's to be bullish about? More than meets the eye.

One of the biggest fears for drybulk shippers such as Genco is an overabundance of ships on the market. Genco alleviated these fears with its last earnings report, showing a 35% jump in revenue despite the increased competition. We've been warned for months that Genco would have trouble leasing its vessels in such a crowded market; I feel the company has proven analysts wrong.

I'm even more excited by the company's move toward short-term charter contracts. It's true that long-term contracts provide rate stability and a guaranteed form of cash flow, but with the Baltic Dry Index near multiyear lows, shifting toward shorter-term business makes complete sense. Why would the company lock itself into long-term low-rate contracts, when it could use this time to be price-competitive with its rivals? This way, it can lock in higher charter rates on new contracts when BDI rates finally do rise.

In contrast, rivals DryShips (Nasdaq: DRYS  ) and Eagle Bulk Shipping (Nasdaq: EGLE  ) have much longer charter contracts. Although these companies receive guaranteed cash flows, the pacts could hamper their ability to negotiate higher rates when the BDI does rebound.

Genco trades for just one-third of its tangible book value, despite raking in $4.07 in earnings per share over the trailing 12 months. As long as the company can keep its fixed costs under control, the company's stock price has a chance to sail significantly higher than its current valuation.

What's your take on Genco? Is the company ready to set sail, or will it continue to take on water? Share your thoughts in the comments section below, and consider tracking Genco Shipping, as well as your own personalized portfolio of stocks, with My Watchlist.

Fool contributor Sean Williams has no material interest in any companies mentioned in this article. He would like to remind you that our friends in Japan could still use a helping hand. You can follow him on CAPS under the screen name TMFUltraLong.

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Read/Post Comments (5) | Recommend This Article (5)

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 April 07, 2011, at 4:09 PM, IBJAMMIN wrote:

    Having lost a significant share of it's electrical output and suffering rolling blackouts, Japan will need to import more coal and LNG. They will also need more lumber, cement, steel and iron ore to rebuild the tsunami and earthquake damage. This includes roads, bridges, as well as homes, apartments, factories, and offices. This will require greatly increased amounts of if those dry bulk commodities. With the backdrop of a gradually expanding world economic recovery, I don't see how the shippers can help but do better.

  • Report this Comment On April 07, 2011, at 7:48 PM, imacg5 wrote:

    What are you talking about?

    GNK had an increase of 18.2% in operating revenue YOY.

    Because they added 15 ships.

    Which gave them an increase in ownership days of 36.2%.

    From the earnings report:

    (1) We define ownership days as the aggregate number of days in a period during which each vessel in our fleet has been owned by us. Ownership days are an indicator of the size of our fleet over a period and affect both the amount of revenues and the amount of expenses that we record during a period.

    While the TCE, the term charter equivalent, is the average charter rate that their fleet earned, and that dropped by 13%, YOY.

    The analysts didn't say that Genco would have trouble leasing their ships, they said that they would be leasing them for depressed rates.

    The FFA's have rightly predicted the continual fall in rates, and they have been right. The pundits have been speculating that the overabundance of ships would never materialize, and they have been wrong.

    Based on the ever growing orderbook, and the FFA's, the glut is real and will continue.

    You want to trade on last years earnings?

    2011 Estimates are to earn 98 cents.

  • Report this Comment On April 07, 2011, at 8:09 PM, BearishKW wrote:

    Even at .98 eps for 2011 the stock trades at a forward p/e of 10, no?

    IMO it's worth taking a look.

  • Report this Comment On April 07, 2011, at 8:43 PM, Seano67 wrote:

    I agree that Genco might be considered a very good contrarian buy. It's incredible to think that this company was trading at over $84 per share less than three short years ago. The dry bulkers are one of the ultimate cyclical sectors, and the sector has been underperforming and lagging so badly and has fallen so out of favor even amongst its most loyal shareholders that it might very well be nearing its trough, and thus could be considered an excellent contrarian buy. They invest in hard assets and buy ships when the sector is falling, and then make money by the fistfuls when the economy starts booming again, and it will boom again, of that there is no doubt.

    The world ain't coming to an end, and neither is the shipping industry. I hold no position in Genco nor any other dry bulkers at this time, but I can see where GNK and several other of the dry bulkers might either currently be or very shortly be in the position of becoming relatively fantastic contrarian buys. Just my opinion.

  • Report this Comment On April 08, 2011, at 11:18 AM, Rehydrogenated wrote:

    I was just looking at buying GNK, which means if i buy it today, you can expect it to fall 30% over the next 2 months....Just speaking from experience

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