With “help” from the bear market of 2008 and early 2009, another cyclical industry experiencing a downturn is the shipping industry. The key indicator for this industry is freight rates, measured by the Baltic Dry Index. Here is a chart of the BDI, taken from Investment Tools.com. As shown, the BDI is much a fraction of it’s peek in mid-2008, but it seems to be stabilizing, with a higher intermediate low and a higher intermediate high.
Baltic Dry Index 2000-2009
Besides the BDI, which is a direct measurement of shipping rates, another indicator to look at is the Delta Global Shipping Index (Symbol: DGA), which is a basket of 30 shipping stocks. You can invest in this index via the Claymore/Delta Global Shipping Index ETF (Symbol: SEA). Here is a 1½ year weekly chart of SEA, taken from Stockcharts.com
1½ year chart of SEA
Source: StockCharts.com
My main argument about investing in shipping stocks is first, they provide an essential and irreplaceable service. No other transportation method is as cost effective as shipping. Thus, sooner or later, with the recovery of the economy, they will be expected to pick up.
Shipping stocks also present an attractive investment because of their outstanding valuations. Many shipping stocks have historical P/Es and forward P/Es in the single digits. They also have excellent dividend yields. Below are some of the best shipping stocks by valuations:
| Stock | Historical P/E | Forward P/E | Dividend yield |
| FREE | 1.60 | 3.50 | 19.11 |
| PRGN | 1.70 | 2.40 | 5.18 |
| SB | 2.30 | 3.30 | 8.86 |
Data obtained from MSN Moneycentral Deluxe Screener on the 3rd of September, 2009.
To dig in a little deeper, I was looking for shipping companies with long term charters, thus being relatively unaffected by the current drop in the Baltic Dry Index. FREE depends quite heavily on the spot market. FREE has secured only about 53% of their available days in 2009 through charters. (2008 Annual Report). PRGN on the other hand relies on 1 to 5 year charters, which helped them weather the slump. Paragon vessels are now expected to be under contract for 84 percent of the days in 2010 and 66 percent of 2011. However, according to Neil Carvin from Seeking Alpha, PRGN is more highly leveraged, and has been having some difficulties financing its debt.
As an alternative to picking out individual shipping stocks, especially if one has limited capital and wants some diversification, would be to purchase a shipping ETF, such as the one mentioned above.
In summary, another value/turnaround investment opportunity is in the shipping industry. Shipping cannot be replaced and cannot become obsolete. However, unless you are thinking of making a long-term investment, some market timing should be helpful. It is unlikely for shipping stocks to fall much further, but it might take some time before they breakout from the current consolidation.
(Disclosure: I am currently long PRGN and OCNF)
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