Shipping industry stocks have taken it on the chin in recent weeks, as the capacity glut in the sector has grown and charter rates have declined dramatically.
Additionally, there are wild cards ranging from decreased Chinese iron ore production and bad weather in Australia to an increase in piracy in the Gulf of Aden. As a result, many investors are content to give a wide berth to the entire sector.
But while significant challenges remain for shipping companies — factors that may continue to batter earnings in the short term — investors who keep a safe distance from all shipping stocks could risk leaving money on the table.
Why? There are a number of cheap — and chic — shipping stocks hovering around the $5 and under mark that could be bargain buys now in anticipation of an economic rebound that eventually will boost shipping volumes and charter rates.
The rule (if there is such a thing in today’s volatile global shipping environment) is that companies with smaller ships in their fleets are better positioned to take advantage of short-term charter or spot markets, because their vessels can be operated more affordably than super-sized ships.
Conversely, companies with large numbers of large capesize ships in their fleets do best when they have many long-term contracts in force to counter price volatility. When bargain-hunting in these rough seas, here are three stocks investors should consider:
Excel Maritime Carriers (NYSE:EXM). Like all dry bulk carriers, Excel has taken a hit from the surge in the quantity of the industry’s largest cargo ships. However, unlike some competitors, nearly half of Excel’s business is derived from long-term contracts with shippers. These contracts will give Excel a bit of a buffer from rate volatility over the next 24 to 36 months. On Monday,
TBS International (Nasdaq:TBSI) The company reached agreements last month with its lenders to restructure its debt. Management also has committed to issuing new equity. TBS recently took delivery of the first of two newly constructed, multi-purpose “tweendecker” vessels it expects to place into service by the end of the second quarter. These smaller ships are more versatile than the mammoth capesize vessels and better able to turn a profit in the spot market. Despite the risks to the shipping sector in general, TBS shares may be undervalued at this point.
Navios Maritime (NYSE:NM) Like Excel, Navios boasts a significant number of long-term charter contracts — a particularly important factor for company because its fleet is comprised of many of the largest ships. Last week, Navios reported net income for 2010 rose 127% to $154 million; the company also announced it will pay a dividend of 6 cents a share for the fourth quarter. Navios has a stable core fleet of 57 vessels that is reasonably insulated from market volatility. Company officials say this results in dependable long-term cash flow. For 2011, Navios has contracted about 83% of its fleet base, reflecting more than $307 million in gross revenue.
Bottom Line: While shipping stocks will continue to sail through some rough seas, short-term opportunities exist among companies whose fleets boast smaller, more versatile vessels or whose larger, capesize vessels are locked into long-term charters. And in the $5 and under range, the price on these stocks may present an opportunity
As of this writing, Susan J. Aluise did not hold a position in any of the stocks mentioned here.
