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Sector Watch: Searching for Value in the Dry Bulk Shipping S

Source:Optionetics.com Author:Frederic Ruffy Date:03/25/14 Click:

Shares of dry bulk shipping companies saw big gains Wednesday after an index of daily shipping rates posted its best gain in two years. Share prices also found some support from relatively upbeat comments coming out of an industry conference. Now, after several months of heavy selling, some of stocks in the sector are rebounding and there are a few reasons to believe that the strength can continue.

The Baltic Dry Index (BDI) rose 285 points to 5,900 on Wednesday. The index, which isn’t tradable, has been getting more attention in the financial press lately because it serves as a gauge of trends in the dry bulk shipping industry. It actually tracks the spot rates charged for moving dry goods like coal and grains by sea. When the index moves higher, it suggests that shipping companies are seeing strong demand and more pricing power. In short, the BDI is viewed as a barometer for demand, growth and production. 

Prior to Wednesday’s rally, the Baltic Dry Index was not doing well. It had suffered six consecutive losses. It had been almost cut in half over the past three months. The drop in shipping rates seemed to reflect macroeconomic uncertainty and the ongoing decline in the BDI reinforced the view that weaker global economic growth would result in less shipping. As demand for shipping declined, so did spot rates.

However, that trend was temporary reversed on Wednesday after the BDI posted its best one-day gain in two years. In addition, the recovery in the Baltic Dry Index coincided with relatively upbeat comments from a panel at the 4th annual Dry Bulk forum conference. According to Briefing.com, members of the panel noted that a US slowdown will not have a huge impact on shipping. They also said that the increase in oil prices is a net positive for shipping companies because it leads to larger shipments of coal. Finally, the panel noted that the BDI is not a good indicator of future activity. It reflects only current spot prices. 

Taken together, the day’s news was net positive for the sector. Dryships (DRYS) is one of the more actively traded names in the dry bulk sector. The stock is volatile due to the fact that its prices are based on spot rates rather than longer-term contracts. On Wednesday, for example, shares rallied $5.81, or 9.3 percent, to $68.25. Figure 1 shows the weekly action in DRYS prior to Wednesday’s rally. It had fallen from a high of $131.34 in late October to a low of $48.21 in early January, or 63.3 percent.

  
Figure 1: DRYS Weekly Chart

Dryships wasn’t the only stock rebounding on Wednesday. The entire sector caught fire. Among the day’s biggest movers, TBS International (TBSI) surged $5.11, or 19.8 percent, to $30.91 a share , Eagle Bulk Shipping (EGLE) jumped $1.01, or 4.34 percent, to $24.26, Diana Shipping (DSX) gained 63 cents, or 2.4 percent, to $27.29, and Exel Maritime Carriers (EXM) gained $1.92, or 6 percent, to $33.70.

In addition, a merger was recently announced in the industry. Yesterday, Exel Maritime Carriers said it was buying Quintana (QMAR) in a cash and stock deal worth $2.45 billion. Prior to the news, QMAR had suffered a three-month 40 percent slide. Now, however, it appears that, not only investors are looking for value in the sector. The merger is a sign that some dry bulk shipping companies are also finding value in some of the beat down dry good shipping stocks and that, in turn, bodes well for other stocks in the sector looking forward. 

Frederic Ruffy
Senior Writer & Index Strategist
Optionetics.com ~ Your Options Education Site
Visit Fred Ruffy’s Forum

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