The dry bulk shipping sector is, without a doubt, one of the most hated sectors in the market right now, and has been for quite some time. Anyone who invested in a dry bulk shipper before the great recession hit has gotten burned, or in the case of Star Bulk Carriers Corp. (NASDAQ:SBLK) absolutely incinerated. See for yourself.
One of the biggest arguments on the bear side of the dry bulk shipping debate is that an oversupply of ships will seriously dampen the ability of companies in the sector to generate profits.
According to Clarksons, total tonnage of the world’s dry bulk fleet has increased by 41.25% since 2008.
Yet, there are some signs that the glut may be coming to an end. Rongsheng Heavy Industries Group, China’s largest private shipyard, has seen its shares drop more than 20% in less than a week. Reports of the company conducting massive layoffs have recently surfaced. It posted a loss of nearly $100 million in 2012, after three straight years of profitability.
Another common reason the bears give for having disdain for dry bulk shippers is that charter rates for vessels have experienced an incredibly steep drop.
You can’t have an article about dry bulk shippers without talking about the Baltic Dry Index, or BDI. The index is representative of the cost level for the seaborne transportation of dry bulk goods (grains, iron, coal etc.) A higher index equals higher transportation costs, which means more profits for shippers.
The index peaked at an all time high of 11,793 in 2008. Since then it has completely tanked. It hit a 16-year low last year of 647, which equates to a decline of over 94%! But the index has been on the rise. The current level of 1,103 represents a 55% gain since the beginning of this year.
The bullish side of things
When I made my first few investments I did not know very much. But I had read Benjamin Grahams’s The Intelligent Investor. One takeaway I got from the book was that buying businesses below tangible book value can be a very good thing. And the dry bulk shipping sector is full of companies selling at huge discounts to tangible book value.
Thus, I made an investment in a dry bulk shipper. I’m sitting at a loss right now, but I’m betting that in this case patience will be a virtue and not an act of stupidity.
The following table contains some basic balance sheet data on these three shippers (as well as current market caps):
|Market Cap:||$817.6 M||$385.7 M||$29.7 M|
|Working Capital:||$370.59 M||$44.06 M||$1.28 M|
|Shareholders Equity:||$1265.16 M||$438.12 M||$117.95 M|
|Price/Tangible Book Ratio:||.64||.89||.26|
All three of these companies are trading at discounts to both shareholder’s equity and tangible book values.
Based on those numbers it looks like Star Bulk Carriers Corp. (NASDAQ:SBLK) is definitely the riskiest of the three, but it also has the greatest potential upside. Diana Shipping Inc. (NYSE:DSX) is probably the safest bet of the three, although gains in any of these companies are far from certain to be sure.