Time to Load Up on Shipping Stocks

The dry-shipping stocks are the only group we have talked about as much as the coal sector this year, and we believe traders should take another look at the group before these stocks rally further and the group moves out of reach.

The dry-shipping stocks are a "one off" play to the commodity sector. These companies transport bulk commodities, such as coal, grains and iron ore internationally. The torrid growth seen in Asia and India is keeping shipping rates high as commodities from around the world pour into these economies and fuel the industrial boom.

Baltic Dry Index

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The single most important metric to follow for this group is the Baltic Dry Index, which is an index of international shipping rates. The Baltic Dry Index went parabolic and surged to all-time highs late in 2007 before correcting, as traders anticipated the domestic recession to slow down the global economy.

Since then, the index has retested support and started working back toward the 2007 highs. The recovery in shipping rates has been impressive and suggests that global demand for commodities has remained strong while shipping capacity remains somewhat constrained for now. Traders can get involved with this group on the long side at this level and look for continued strength in international shipping rates through the end of the year.

Dry Ships (DRYS - commentary - Cramer's Take) is our favorite name in the dry-bulk shipping sector. Dry Ships' earning are tied directly to spot shipping rates since the bulk of the company shipping capability is not under long-term contract.

If we believe that shipping rates will continue moving higher, then DRYS should benefit in a linear fashion. The real surprise could come from the fact that most analysts are factoring in lower shipping rates for the year, and they are calling for a significant decline in revenues. If average shipping rates remain relatively high, then we could start to see analyst upgrades hit the tape and pull buyers into the name.

Dry Ships

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The stock has formed a bullish double-bottom formation off of the long-term uptrend line. The stock has broken out over resistance at $88 and confirmed the bullish reversal pattern. The completed reversal pattern suggests the stock is ready to resume the primary uptrend and get back on the offensive. Traders could get long over $88 and a failure below the recent consolidation at $78 could be used as a stop-loss.

The commodity trade should start to spread out and encompass "one off" or second-tier names related to the sector as the market strengthens. Traders can get involved with the dry-shipping names right here, as the global expansion and commodity consumption continues for the foreseeable future.

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At the time of publication, John Hughes and Scott Maragioglio were long Dry Ships. Hughes and Maragioglio co-founded Epiphany Equity Research, which has developed and utilizes proprietary tools to identify and track liquidity changes in the market indices and sectors. Hughes advises numerous asset managers, hedge funds and institutions managing in excess of $30 billion. Maragioglio is a member of the market technicians association (MTA) as well as The American Association of Professional Technical Analysts (AAPTA) and holds a Chartered Market Technician (CMT) designation. Maragioglio has also served on the board of directors of the AAPTA.