Shipping stocks are among the most volatile in the entire stock market. That's because rates can change on a dime. As a result, shipping companies can go from making a boatload of money to seeing their profits sink deeply into the red. Making matters worse, it costs big bucks to build out fleets, which often leads companies operating in the sector to take on lots of debt that adds extra weight holding them down during turbulent times.

That volatility has been evident at both Textainer Group Holdings Ltd. (NYSE:TGH) and Nordic American Tankers Ltd. (NYSE:NAT) in recent years. Because of that, investors need to weigh their upside in a recovering market against the downside potential before choosing either stock. 

Oil tanker ship at sea on a background of sunset sky.

Image source: Getty Images.

The case for and against Nordic American Tankers

Nordic American Tankers is currently in the midst of a very challenging period. The oil tanker company has seen shipping rates plunge in the last year after OPEC's decision to cut production so it could drain the excess oil sitting in storage depots around the world. With fewer barrels heading out to sea, Nordic American Tankers' shipping rates plunged to $11,200 per day per ship in the first quarter, which was well below the historical average of about $30,000 per day over the last 25 years. Because of that, the company is losing money, which has weighed on the stock price in the past year, pushing it down by more than 50%.

However, Nordic American Tankers has worked hard to right its financial ship in recent months. The company recently announced the sale of eight of its 33 vessels, which will bring in some much-needed cash. Meanwhile, it signed long-term contracts for some of its newest tankers that will lock in rates between $21,000 and $25,000 per day. Those contracts are a notable development since the company typically takes whatever the market will give it, instead of locking itself into long-term contracts. These improvements could help lift the stock, especially if more oil starts flowing as a result of OPEC's decision to boost output.

A container ship seen from the view of a container.

Image source: Getty Images.

The case for and against Textainer Group Holdings

After several challenging years, the financial results of shipping-container leasing company Textainer have started improving. It posted its fifth consecutive quarter of revenue growth earlier this year while also returning to profitability. Making the company's most recent improvement even more noteworthy is that the first quarter is a traditionally weaker one for the container shipping industry.

Meanwhile, Textainer sees even better days ahead, which led it to order $428 million in new containers this year. With the company "heading into the traditional peak season with great momentum," it's well positioned to continue growing, according to CEO Philip Brewer. That near-term upside leads many to believe that now's a great time to buy this turnaround stock, especially since shares are down more than 25% this year after an incredible run in 2017.

However, there's a reason shares have given back a portion of those gains: the growing trade war between the U.S. and China. Those two countries, as well as several others, have levied tariffs on a variety of goods. The concern is that this will slow global trade, which could impact the rates Textainer earns on leasing out shipping containers. If they tumble, it will hurt Textainer's financial results. The company has some protection in place because it signed longer-term contracts locking in rates on a significant portion of its containers. But those agreements weren't enough to keep its financial results from sinking deeply the last time the shipping industry hit turbulence.

I'm not enthusiastic about either one

On the one hand, both stocks could have significant upside from here, given that industry conditions appear to be turning the corner. On the other, further deterioration could come swiftly, and snuff out hopes for a rebound. That's why I think it's best that investors hold off on buying either of these shipping stocks for the time being and wait until there's more clarity on whether the improvements in industry conditions have staying power.

Matthew DiLallo owns shares of Textainer Group. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.