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.

Sector overboard!
When Deutsche Bank downgraded Genco Shipping (NYSE: GNK) yesterday, warning of "more pain ahead," well, truer words were never spoken -- or, at least, truer words were never heard by investors.

According to Deutsche, demand for commodities from China and India will struggle to fill the holds of the many, many new dry-bulk vessels expected to float onto the market in 2011 and 2012, creating a "weak dry bulk market in the near-to-intermediate term." When Deutsche said this, investors naturally took it as a cue to sell off shippers in, well, bulk.

Genco promptly shed 7% of its market cap, but the damage didn't end there. The pain quickly spread to shareholders of Diana Shipping (NYSE: DSX), Excel Maritime (NYSE: EXM), and Eagle Bulk Shipping (Nasdaq: EGLE), whose shares slipped 1%, 5%, and 7%, respectively. And maybe rightly so; after all, Deutsche is one of the best analysts out there, ranking in the top 10% of investors we track on CAPS. Surely, if Deutsche has gone dour on dry shipping, it's time to abandon ship, right?

Let's go to the tape
Not necessarily. Deutsche may be a good analyst, but it's not perfect, and it's not good at everything simultaneously. In fact, when it comes to charting fortunes in the shipping sector, Deutsche is a bit of a dud:

Company

 

Deutsche Said

CAPS Rating
(out of 5)

Deutsche's Picks Lagging S&P by

Excel Maritime Outperform **** 30 points

American Commercial

(Nasdaq: ACLI)

Outperform **** 40 points
Frontline Ltd. (NYSE: FRO) Outperform *** 51 points (picked twice)

Fact is, 71% of Deutsche's picks in the marine industry have underperformed the S&P 500 historically. Genco in particular, lagged the market by a good 35 percentage points before Deutsche dumped it. Simply put, if you're going to use Deutsche's dry-shipping advice for any purpose at all, you're probably better off using it as a contrarian indicator.

Logic overboard, too!
Curiously, that's precisely the opposite of what investors did yesterday. While I'm far from universally optimistic about shipping stocks, I do believe investors are wrong to be selling all of these stocks simply on Deutsche's say-so, not least because they appear to be reading a bit too much in Deutsche's analysis.

Consider: Of the multiple stocks representing the shipping sector, Deutsche picked only one -- Genco -- to downgrade yesterday. Moreover, in downgrading Genco, Deutsche cited very specific concerns about the stock; in particular, the fact that it's leveraged to Chinese coal consumption.

Deutsche believes China has embarked upon an effort to control inflation by tapping the brakes on growth and improving the efficiency of its companies' operations. In each case, this points to reduced demand for coal shipments. Additionally, Deutsche notes that China is trying to source more of its thermal coal from Indonesia, which makes for a shorter trip than coal imported from Indiana, and will reduce the number of "ton-miles" Genco gets to charge for. In each case, Deutsche says Genco looks particularly vulnerable to revenue pressures inasmuch as it's more dependent on spot-rate shipping contracts than on longer-term contracts.

Foolish takeaway
Now maybe Deutsche is right about all this. Maybe it's wrong. But whether or not you buy Deutsche's analysis, I fail to see how this necessitates torpedoing shipping values across the industry. The fact that investors reacted to yesterday's Genco downgrade by chopping 5% off the market cap of DryShips (Nasdaq: DRYS) looks particularly illogical, inasmuch as we know that:

  • DryShips has focused on signing long-term contracts on its vessels (some with as much as eight years left to run), paying as much as $56,100 a day.
  • As many analysts have pointed out, DryShips is becoming ever-less-dependent upon shipping revenues in general, and ever-more-tied to the oil-drilling market.

To put it another way, there are a lot of different fish in the dry-bulk-hauling sea. They're not all the same size, much less the same species, and they don't all deserve to be netted, hauled over the rail, and dumped into the same hold with Genco.

Fool contributor Rich Smith does not own shares of (nor is he short) any company named above. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 625 out of more than 170,000 members. The Motley Fool has a disclosure policy.

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