When I said ahoy to Bermuda-based "dry bulk" shipping company Excel Maritime Carriers (AMEX:EXM) five days ago, the stock had gone up 300% since the company announced a 338% increase in earnings in August. It closed at $40.25 a share and was one of the largest percentage gainers that day.

The company's stock has soared 65% since then -- reaching a high today of $65.85 before falling back to $56.00. What gives?

This is a great example of a momentum-driven bubble.

Excel Maritime has profited handsomely from a spike in shipping rates. The boom in Asia has caused a real shortage of dry bulk vessels.

Because Excel Maritime had a clean balance sheet, the earnings boom is putting meaningful amounts of cash on it. This cash raised the prospect that the company could execute its long-held desire to expand without taking on significant debt.

But, at today's high, the company was valued at $765 million -- and its sales are less than $40 million. That is a Taser-like (NASDAQ:TASR) valuation for a company without the lack of competition Taser faces.

Margins are high at Excel Maritime because of a worldwide shortage of shipping capacity. But the company operates in the spot and short-term market. Just as it benefited quickly from the rapid rise in rates, it will suffer an equally quick fall when rates come back down.

When will rates fall? Shipbuilders will be launching a lot of dry bulk capacity starting in 2005. Order rates, spurred by the strong rates, have boosted shipbuilding orders. While it will be some time before capacity and demand balance, there is no doubt rates will fall (assuming an economic lull doesn't come first).

As I reported earlier in the year, shipping giants Teekay Shipping (NYSE:TK), Frontline (NYSE:FRO), and other oil transportation companies are enjoying Boom Profits, Bust Prices. The market fears overcapacity and has kept a lid on stock prices.

Excel Maritime's stock had an exciting run on a significant earnings increase. That continued run, though, has reached bubble proportions because the company has yet to make a case for how it will grow -- yet the stock acts like someone knows something.

Know this: Based on historical operating margins, this company is overvalued. Even with the cash piling up, it is hard to justify today's price.

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Fool contributor W.D. Crotty does not own stock in any of the companies mentioned.

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