Although dry bulk shipping stocks have sailed on the tailwinds of higher rates and stronger demand this week, investing in these volatile, small-cap stocks is not for the faint of heart — or light of wallet.
But if you have a higher risk tolerance and a little mad money sitting around, shipping stocks could pay off for investors who actively manage a portion of their assets actively.
Investors who hear the siren song of shipping stocks are lured in by a recent rebound in the Baltic Dry Index (BDI), deeply depressed share prices, and double-digit dividend yields.
The BDI is a measure of how much it costs to move commodities by sea. Although the BDI has surged more than 100 points over the past couple of weeks, it is down more than 45% since December 2013.
One big reason not to bet on the long-term recovery of the dry-bulk shipping sector is that the supply of cargo vessels continues to exceed demand — and it likely will for the next couple of years at least. Shipping companies that commissioned hundreds of new state-of-the art ships and tankers during the sector’s heyday five years ago received those vessels amid the worldwide financial crash.
But there are a couple of short-term trends that favor dry-bulk shipping stocks. Although the problem of having too many ships chasing diminished demand will continue to haunt the sector, shipping companies that cut costs and take advantage of seasonal shifts in demand to raise rates can realize near-term profits now.
The key is that most of these shipping stocks have high betas.
Beta is another indication of volatility — and there are a lot of high-beta stocks in this sector. A stock with a beta of 1 has the same level of volatility as the broader market. A beta of less than 1 is less volatile, and more than 1 is more volatile. Consider that a beta of 1.2 indicates a stock is 20% more volatile than the broader market — meaning that it moves faster than the market at large.
Volatility can be a good thing for the day trader who is looking to gain from short-term trends and wild swings. After all, if the stocks are moving up, more volatility can mean faster gains. And there are plenty of things that could send shipping stocks up.
China’s economic growth may be cooling off, but its imports of raw materials — particularly iron ore which is used to make steel — will surge between now and January. That is good news not only for major iron-ore producers like Brazil and Australia — these cargoes move by ship and the strong demand is driving shipping rates higher.
Although iron ore prices have weakened, exports are getting stronger — and this is the time of year when China stockpiles iron ore. Rates for Capesize vessels, which can carry about 160,000 tons of iron ore or other bulk products, have surged nearly 40% in recent weeks. This activity is seasonal — demand slumps beginning in January. This creates a short-term opportunity for investors who want to cash in on near-term gains in dry bulk shipping stocks now and taking profits by year’s end.
Here are three shipping stocks that are gaining steam now.
Paragon Shipping (PRGN)
1-Year Performance: -32%
Current Dividend Yield: None
Paragon Shipping (PRGN) has been on a pretty wild roller coaster ride of late, hitting a one-year low earlier this month before surging 20% this week. It’s easy to see why PRGN has a beta of 3.2 — meaning the stock typically moves at triple the speed of the broader market.
PRGN has a diversified fleet of dry bulk vessels — its Panamax ships haul coal and iron ore for energy and steel production, as well as agricultural products for food and animal feed. The company also has Supramax and Handysize drybulk carriers to transport other raw materials. The company’s goal is to balance its long-term charter contracts while maintaining the potentially higher rate opportunities of the spot market.
Navios Maritime Holding (NM)
1-Year Performance: -23%
Current Dividend Yield: 4.7%
Navios Maritime Holding (NM) is a global, vertically integrated seaborne shipping and logistics company operating 147 ships for dry bulk commodities including iron ore, coal and grain. So far this year, NM has been sailing on increases in its charter rates in recent months, in addition to double-digit revenue growth in its logistics business.
Although the coal market continues to sink in the U.S., China continues to be a large importer. China and India also are boosting imports of grain substantially, which should help beef up its bottom line in the near term. NM has strategically developed cost-cutting measures that can enhance shareholder value — particularly the use of index-based contracts, which can be adjusted when the index rises or falls.
Safe Bulkers (SB)
1-Year Performance: -19%
Current Dividend Yield: 4.4%
After setting a one-year low earlier this month, Safe Bulkers (SB) stock has bounced back in recent days. One reason for the gains: SB recently inked a $210 million revolving credit deal with DNB Bank to refinance an existing loan and to cover two new ships.
Another strong point: Most of Safe Bulkers’ Panamax and larger, so-called “Post-Panamax” vessels, have long-term charters that will expire soon, giving SB the opportunity to write new contracts at higher prices. Considering that SB is one of the few dry bulk shipping companies that did not post a loss last quarter, SB stock should react positively to gains in the BDI.
Bottom Line: There are no buy-and-hold stocks in dry bulk shipping — investors would have more fun setting a huge pile of cash on fire. But there is an angle here for short-term investors who want to bet some Mad Money on the rising tide in this volatile sector. If you’re choosy and disciplined enough to cash out in six or seven weeks, you can take profits before the slow season knocks the sector down again.
As of this writing, Susan J. Aluise did not have a position in any of the aforementioned securities.