Why Now Is The The Right Time To Buy Cheap Shipping Stocks

Dry Bulk Ship

Parts of this post have been redacted due to the author’s wish to remain anonymous.

For those who are bullish on the recovery of global growth, now may be the time to bargain purchase shipping stocks. 

There may be some glimmers of light in this gloom and doom scenario.  It seems recovery is already underway in India, where companies have recently reported to have started buying coal mines in South Africa and iron-ore mines in Australia due to supply shortfalls.[1] 

Though the Baltic Dry Index has not come back to its high in May of 2008, it has rebounded nicely from its December 2008 low.[2]  

Although oversupply may cause consolidation, delays, and cancellations in the short term, perhaps the burst of the shipping bubble may bring positive long term results.  This is likely to send older ships to the scrap yard, forging fleets which are safer, cleaner, younger, and more reliable. 

Many tech analysts believe that the survivors of the bubble burst were the more efficient companies.  Perhaps we may apply the same logic here.  Overseas Shipping Group, (NYSE: OSG), and Teekay Corporation, (NYSE: TK), actually increased their dividend payments in bad times.  Their dividend yields are currently 4.9% and 3.8%, respectively.[3]

This is clearly a depressed industry, but we have seen a few standouts with attractive fundamentals that would be good to own in the long term.  These companies display a solid free cash flow yield, a five year dividend growth rate above 15%, and a debt light balance sheet. 

We look for a young fleet, ample cash, a strong safety culture, and sharp vessel utilization.  We would rather be buyers of shippers exposed to the spot market.  Such stocks have probably been hammered under pricing pressures, rendering cheap valuations and lofty dividend yields.  Such companies free of bound to a long term time charter may see brighter days when rates recover. 

True value investing requires patience, cynicism, and courage.  Although the industry faces challenges, for the discerning analyst who can find the diamonds in the scrap yard, shippers present a low cost way to gain exposure to the global recovery.

Disclosure: Sara Grillo, CFA owns shares of Overseas Shipping Group (NYSE:OSG).


The information contained in this presentation contains confidential information regarding Diamond Oak Capital Advisors, LLC (“Diamond Oak”) and may contain information regarding hedge funds and other investments recommended or otherwise analysed by Diamond Oak.  This document is not an offer to sell, nor the solicitation of an offer to purchase, any interest in Diamond Oak or any hedge funds or other investments discussed herein.  An investment in any hedge fund or other investment discussed herein may be undertaken only through such fund or investment, may be speculative, and may involve a high degree of risk.  An investor in hedge funds could lose all or a substantial amount of his or her investment.

Certain information contained in this presentation has been obtained from sources outside of Diamond Oak and its affiliates. While such information is believed to be reliable for purposes used herein, no representations are made as to the accuracy or completeness thereof and neither Diamond Oak nor its affiliates takes responsibility for such information.  Past, pro forma, hypothetical, projected, or suggested performance of any investment or portfolio of investments is not necessarily indicative of future performance.

This document is neither advice nor a recommendation to enter into any transaction with Diamond Oak or any hedge fund or other investment.  This presentation and its contents are proprietary information of Diamond Oak and may not be reproduced or otherwise disseminated in whole or in part without Diamond Oak’s consent.

[1] Matsuda, Kiyotaka and Suga, Masumi.  “Nippon Yusen to Triple Capesize Fleet Serving India.” Bloomberg, December 23, 2010. 

[2] Per Bloomberg, BDIY Index on 12/29/2010, its low was 663 on 12/5/08, and its high was 11793 on 5/20/08.

[3] Per company website and Yahoo!Finance

NOW WATCH: Money & Markets videos

Want to read a more in-depth view on the trends influencing Australian business and the global economy? BI / Research is designed to help executives and industry leaders understand the major challenges and opportunities for industry, technology, strategy and the economy in the future. Sign up for free at research.businessinsider.com.au.