Three Reasons to Bet on the Shipping Sector

The dry-bulk shipping stocks have been good to investors this year. But things stand to get a whole lot better.

Why, when things are up so much, can they stand to go even higher? There are three reasons: coal, the earthquake in China and the credit crunch.

First, a quick review of how things got to this point.

Since I first highlighted the sector in late January, shares of DryShips(DRYS Quote), Navios Maritime(NM Quote) and Eagle Bulk Shipping(EGLE Quote) are up 73%, 42% and 52%, respectively.

These stocks, the "Class A" acts in the dry-bulk shipping sector, have followed the roller-coaster ride in the cost of freight rates. Last November the Baltic Dry Index, which measures the cost of moving bulk commodities such as ores and grains, started plunging from a November high of 11,039 down to a low of 5,615 -- a 49% drop -- on Jan. 29.

Three Reasons to Buy Shipping Stocks

The fall erroneously led some to see an economic abyss ahead for the global economy, the theory being that shipping reflects overall economic activity.

In reality, what happened this time had more to do with negotiations between iron ore miners in Brazil and the consumers of it in China. The stalled price talks meant the ores weren't being hauled across the ocean, and many large ocean cruisers were available to be rented for substantially lower day rates.

When the negotiations settled, things picked up. And since the low in late January, the BDI has soared to an all-time high of around 11,800.

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Here are the three things to watch going forward.