A Dangerous Opportunity in Shipping Just Got Cheaper

Last month, I wrote about the dangerous opportunity in dry bulk shipping.

The opportunity part came from the price-to-book ratios well below 1.0, the threshold value investors salivate over. Here's where they stood then.

Source: Capital IQ, a division of Standard & Poor's.

At the time, I warned that low price multiples don't always pan out. I used the homebuilders circa the end of 2007 as an example. I also warned about the excruciating volatility of shipping rates, as shown by the movements in the Baltic Dry Index.

If you think the stock market is volatile, try this on for size: In 2008, the Baltic Dry Index reached 11,793. It also fell to 663. Imagine the pandemonium if the Dow fell from 11,277 to under 1,000 and you start to get a feel for how dangerous and tricky this industry is. Then layer on the high leverage employed by most of the players.  

That said, the price-to-book ratios above were taken a few days before the market started tanking in late July. The multiples for each of the companies is even cheaper today.

Source: Capital IQ, a division of Standard & Poor's.

Note that in this time, shipping rates aren't down -- the Baltic Dry Index is actually up a bit.

In this time of high correlation among stocks (i.e., everything going down at the same time), I'm looking for the babies thrown out with the bathwater. I'm still doing my due diligence on the industry, but if you were interested in the dry bulk shippers last month, the industry just got cheaper.

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