When I’m looking for potential momentum trades, one of the things I like to see is a stock and/or sector that was formerly hot, then fell on hard times, and then gets its groove back. I like these kinds of stocks because traders tend to have a good memory when it comes to winners, and that means they’ll revisit a familiar sector if the money starts flowing that way. This scenario has certainly been the case with dry bulk shipping companies of late, as traders are falling in love again with stocks in the space.
Click to Enlarge One of my favorite dry shipping stock momentum plays here is Diana Shipping (NYSE:DSX). Midway through Friday trade, the shares had vaulted 7%. That move is in addition to a 28.5% spike in the shares since the beginning of the year (through March 21). Not coincidentally, the beginning of the latest big run higher took place right after the very bullish technical breaching of the both the 50- and 200-day moving averages.
Interestingly, the stock fell only modestly last week, when the company reported Q4 net income that fell short of analyst expectations. What this tells me is the Street thinks the worst is over for this sector in terms of fundamentals, and that the metrics in the dry bulk shipping space have become favorable again.
Some of those positive metrics include higher industry day rates, which is the rate shippers charge to transport bulk goods. An improving global economy also is a reason to like Diana, because that means more demand for bulk items such as iron ore, core and grains.
I suspect that increased demand for grains and feed stock around the globe will be a key driver of revenue for dry ship stocks in the months and years to come. As more people in countries such as China are able to afford a more protein rich diet, there will likely be more demand to ship the grains and other feedstock needed to feed all of the pigs and chickens that must be raised.
For DSX, the confluence of continued buying from traders and improved fundamental metrics in the dry shipping segment means there’s probably another 15-20% upside in this stock by summer time. Of course, whenever you buy a hot momentum play such as DSX, it behooves you to place a stop-loss order in along with your buy orders. I’d set mine on this one at about 8% below my buy price.
At the time of publication, Jim Woods did not hold a position in any of the stocks mentioned here.