What happened
Dry bulk carrier stocks surged higher on Tuesday after the industry got a positive note from an analyst. Shares of Star Bulk Carriers Corp. (SBLK 1.19%) rose as much as 21%, Safe Bulkers, Inc. (NYSE: SB) was up 19%, Golden Ocean Group Ltd. (GOGL 1.66%) jumped 9.8%, and for a short time, DryShips Inc. (DRYS) was up 10% on the day. By 11:30 a.m. EDT, the only two stocks that were still up double digits were Star Bulk Carriers and Safe Bulkers.
So what
The move today was driven by a note from Morgan Stanley analyst Fotis Giannakoulis, who upgraded Safe Bulkers, Star Bulk Carriers, and Golden Ocean Group today. The broad thesis is that steel shipments have hit bottom and growth in that segment will drive higher dayrates and better financial performance. The three names were picked because of their large, young fleets and a lot of operational leverage as the market improves.
Image source: Getty Images.
Bullishness is backed up by the Baltic Dry Index rising sharply over the past month and is now approaching highs not seen since late 2014. The index is a barometer of demand in the dry bulk shipping market that these companies operate in, so it can give investors a general idea of where earnings may be trending.
On the operational side, it's true that dry bulk ship owners have a lot of operational leverage. Financing, depreciation, and operating costs are generally fixed, so a large percentage of any increase in revenue per day of operation will flow to the bottom line. If the market improves, that's great for investors, but we've seen the downside of that operational leverage in the last few years, when losses were commonplace.
Now what
In the short term, an analyst note can send a stock, or in this case a whole industry, surging. But over the long term, it's operational performance that investors should be concerned about. And while the Baltic Dry Index has been rising lately, that's a trend we've seen a few times in the last three years, only to see the index drop again and net losses show themselves on the bottom line. There may be signs of a recovery in the shipping market, but until it's proven to be long-lasting and not a one-time blip, this is an industry I see as too volatile to be betting on short-term pops and drops. The market can move away from you as fast as it can move in your favor.
