Every day, Wall Street analysts upgrade some stocks, downgrade others, and "initiate coverage" on a few more. But do these analysts even know what they're talking about? Today, we're taking one high-profile Wall Street pick and putting it under the microscope...

Shares of Genco Shipping & Trading Limited (GNK 1.42%) stock are on a tear, up 21% over the past year -- which is nearly 9 percentage points better than the S&P 500 -- and up 18% so far in 2018 alone. What's more, this run may not yet be done. This morning, analysts at German megabank Deutsche Bank announced they're initiating coverage of the New York-based dry bulk shipper with a buy rating and a $19 price target, implying that Genco stock has more than 20% upside from today's prices.

Here's what you need to know.

Dry bulk ship next to pile of coal

Is it time to offload or load up on dry bulk shipping stocks? Image source: Getty Images.

Early innings

Before we talk about Genco itself, we need to talk about probably the single factor determining whether Genco thrives or fails: The Baltic Dry Index.

Surveying the rates being charged for ferrying dry bulk cargo (grains, iron ore, coal, etc.) along nearly two dozen major shipping routes, the Baltic Dry Index (BDI) attempts to measure global demand for dry bulk shipping capacity versus the supply of ships available to carry cargo, and reflects this assessment in the form of a single index number. This number could theoretically range anywhere from 0 to infinity, but in recent years has ranged from as low as 291 in February 2016 to as high as 11,793 in May 2008.

The BDI has been falling pretty steadily for most of this year, which is bad news for shippers like Genco, because it indicates weakening pricing power for their services. The BDI bottomed out at 948 a few weeks ago, but has been inching back up since, and closed out last week at 1,014.

Some may consider this modest improvement a mere blip in a longer-term trend downwards. But in Deutsche Bank's view, the improvement has legs, and its small size to date indicates only that we are in the "early innings" of a recovery, as the analyst explains in a note covered today on TheFly.com.

Why buy Genco?

Deutsche Bank's optimism about a reversal in the downward trend in dry bulk rates underlies the analyst's recommendation that investors buy Genco. The analyst also concedes, though, that it likes the fact that Genco has only a modest amount of debt on its balance sheet at present ($343 million net of cash, on a market capitalization of $535 million).

In general, says Deutsche, it "prefers" companies with low leverage on their balance sheets, which gives them the flexibility to profit in the beginning stages of a recovering market -- perhaps by buying up weaker operators, or adding ships to its fleet in order to gain market share. (A strong balance sheet also, incidentally, would help to keep a company afloat while awaiting for a recovery, should it take longer to develop than Deutsche is forecasting.)

The fact that Genco stock has been gaining strength even though the BDI has been declining over the first few months of this year suggests that other investors share at least one of these views.

Why buy somebody other than Genco?

And yet, if you survey the dry bulk landscape today, something becomes apparent: Genco isn't carrying an unreasonable amount of debt on its balance sheet -- but neither are all its competitors. To cite just a few examples, data from S&P Global Market Intelligence show that:

  • Rival Eagle Bulk Shipping carries only $257 million in net debt -- both less debt than Genco, and significantly less than Eagle Bulk's market capitalization of $368 million.
  • DryShips, probably the most infamous of the dry bulk shippers in this industry, has even less debt: $130 million versus a market capitalization of $380 million.

On the other hand:

  • Navios Maritime is carrying $469 million in net debt on a market capitalization of only $291 million.
  • Diana Shipping has $561 million in debt on a market cap of $382 million.
  • Scorpio Bulkers carries $647 million on a market cap of $552 million.
  • And Star Bulk Carriers has $770 million in debt, but a market cap of only $724 million.

So maybe Deutsche Bank has a point after all. Genco's balance sheet certainly looks more ship-shape than these latter four competitors. Also, all four of these dry bulk shippers are underperforming the S&P 500 over the past year. Then again though, Eagle Bulk Shipping and DryShips have underperformed the S&P despite their relatively strong balance sheets.

And that may be the most important fact of all for investors to note: If the dry bulk shipping business -- and the BDI -- continue to improve, Genco Shipping could be only the first of new buy recommendations to surface on Wall Street.