Sunday, January 30, 2011

Rough Seas Still For Shippers

As part of my search for safe and cheap stocks, I'm usually looking around in distressed/unloved industries. The shipping industry is certainly fits the unloved category right now. There are plenty of low P/E and low P/Book candidate shippers to look at. Check out the chart below which shows two shippers ( picked at random ) and their share performance vs the S&P 500. The industry has been a dismal performer. That's usually a good sign as it's a good place to invest looking forward.


One would think that with the world economy improving, the shippers would be a good place to be. In previous cycles, the shippers have been a good place to be, giving investors huge returns. With the Baltic Dry Index ( index that tracks shipping prices of dry goods like grain, ore pellets and coal ) back to 2008-2009 levels, it seems to have little downside left. However, all is not well on the high seas. The outlook for the shippers is murky, which is ok, but it's the potential downside that worries me. During the last boom cycle, the shippers flush with cash, ordered a record number of ships. Those ships are now being delivered. In fact, all those extra ships ( & payments ) combined with low shipping rates and debt laden balance sheets will likely significantly reduce their earnings power going forward. The risk/reward scenario for these stocks isn't in our favour. So for now, we'll let a few more quarters float by - then re-assess.

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