Will This Eagle Fly?
I want you to think back to better times. Think back to 2005 and 2006. The real estate market was booming and the stock market was moving higher. You were actually happy to receive your monthly 401K reports and your retirement seemed safe and secure.
The biggest challenge you had was deciding if you’d retire early or not.
Back in those boom times, one industry was growing like a weed. Their service was in huge demand and their revenue was going through the roof. The entire industry generated nice earnings and they made huge dividend payouts to their shareholders.
Once the global recession hit, the industry withered like a delicate flower in the hot Arizona summer sun!
At one point, it seemed like the entire industry would fold up and go away.
I’m now seeing signs of life. I think now might be a great time to invest in this industry. I can see big gains ahead!
What industry am I talking about?
The shipping industry of course.
Companies like DryShips (DRYS), Diana Shipping (DSX) and Eagle Bulk Shipping (EGLE) all had their hat handed to them in this recession. Demand for shipping fell off a cliff as the global recession virtually ground economic trade to a standstill.
The Baltic Dry Index serves as a rough measurement of the cost to ship dry goods all over the world. The London-based Baltic Exchange gathers information from shipping brokers around the world. They determine what it costs to ship various goods from different points.
By gathering all the data, they are able to determine the index numbers. These numbers roughly determine the health of the industry.
I know it sounds a bit complex, but here’s what you really need to know.
As the Baltic Dry Index falls, it means the price to ship goods is falling. As it rises, the cost to ship goods is increasing. The higher the index, the more shipping companies can charge their customers.
The higher the index value, the better the shipping industry’s financial performance will be. Obviously, the time to invest in shipping companies is when the index is moving higher.
Clearly, prices are starting to recover. But the bigger question is why?
I see a few different reasons…
First is the start of the economic recovery. As the global economy recovers, we’ll see trading activity improve. That means more demand for shipping. And of course, as demand increases, so will shipping prices… that’s a great sign for the shipping industry.
Another driver of shipping prices is the price of commodities.
Follow my thinking here.
A significant portion of the good shipped are raw materials… commodities. They might be shipping iron ore from Brazil to China or grain from the United States to Europe. As the price of commodities climb, it’s a sign that commodity demand is increasing as well.
Rising commodity prices indicate increasing demand… and that leads to more shipping. And what I’m seeing now is commodity prices increasing across the board. It’s a trend I think will continue for some time.
With shipping activity increasing and the price to ship goods finally moving higher, I think we’re at the start of a long term trend moving higher in the industry.
What’s the best way to profit from this trend?
I don’t think you can go wrong buying shares of any of a number of shipping companies. Two of the largest are DryShips and Diana Shipping. They give good exposure to the industry, have a large fleet of ships, and are sitting on big hordes of cash.
Best of all, just this morning DryShips reported earnings better than analyst estimates.
Yet another good sign the industry is improving.
Investing in the industry giants is easy. If you want to be a little more aggressive, you might consider buying shares in one of the smaller shippers. Eagle Bulk Shipping only has a market cap of $300 million and a stock price of just over $5.
They’ll be reporting earnings on November 5th. If the early trend this earnings season holds, I think Eagle could beat estimates as well. That might propel their stock significantly higher. Will this Eagle fly? I think it will!
Category: Stocks
