Shares of marine shipping and small-cap energy services stocks have been hammered over the past week for reasons that have more to do with profit-taking than anything
Of course, when your stocks go down in value you sometimes don't really care if it's due to something wrong with the business or the fact that recent momentum traders are exiting. It all feels the same.
No one has a perfect view of the future, but it sure looks to me like this is a great opportunity to pick up shares of leading dry-bulk shippers like
Genco Shipping & Trading
(GNK - Get Report)
(DRYS - Get Report)
(NM - Get Report)
(PRGN - Get Report)
while they endure this rough spot.
Let me give you a quick update on the marine shippers, and then introduce
, a risky but promising new name that even longtime followers of the group may not know about.
Whenever stocks have violent shakeouts while perched materially above long-term support, as these have, they become very vulnerable to panicked selling by momentum traders who know nothing about their business. But ultimately investors with more knowledge about the real worth of the companies step up and support the stocks by taking advantage of substantial dips, and that is what should happen in this case.
According to analysts at Jefferies and Cantor Fitzgerald, the spot charter rates of Capesize dry-bulk ships fell last week as the amount of space available on ships grew. The supply increased because Chinese steel makers have begun to draw down their iron ore inventories rather than bring in more supply while they initiate annual negotiations with miners over 2008 prices.
Jefferies and Cantor both believe that charter pricing will get back on track and move higher again once the negotiations mature, as the Chinese cannot pull down their inventories very long.
Lazard Capital Markets analyst Urs Dur told me Monday afternoon that the volatility at this time of year might be news for new investors in the group, but anyone who has been around dry-bulk shipping for a few years knows that this type of gamesmanship on pricing, both by Chinese buyers and the Chinese media, is typical and not indicative of deals that will ultimately be struck. Dur noted that the Chinese ore buyers whined about pricing last year but acquiesced in the end.
The key is to watch not what the Chinese are doing, but what the actual charterers of ships are doing. He said that the iron ore miners like
of Australia are trying to lock in charters at today's prices for three to five years. Given that charter rates are now at their highest point in history, when you see smart cargo owners are willing to pay a lot for a long time it tells you that they think rates will be higher next year.
To put a number on it, Dur said that in 2007 through last week, ore shippers finalized 451 charters of over one year in length. In all of 2006 the number was 246, and in 2005, the number was 176. "Companies with major mining commitments need capacity to move their cargoes to a very hungry China," said Dur. "China saying that they are going to stop consuming iron ore is like America saying that they are going to stop consuming McDonald's hamburgers."
Not gonna happen, in other words.
So demand for dry-bulk ships isn't deteriorating, so don't get spooked out of the industry. All the stocks in the group are buys, though my favorite is Genco due to its superior management, youthful fleet, long-term focus and charter coverage through much of next year.