5 Reasons Shipping Stocks are Sailing Higher

Jonathan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

A "Perfect Storm" of factors has gathered that has shipping stocks sailing higher in recent trading.

While The Great Recession sank many shipping companies, others have started to recover.   Over the last month of market action, Frontline Inc (NYSE: FRO) and Starbulk Carriers (NASDAQ: SBLK) were both up more than 20%.  For the last four weeks, Costamare Inc. (NYSE: CMRE) rose by 18.93%.  Genco Shipping & Trading (NYSE: GNK) jumped by 17.30% for the same period.   Strongest of all was Ultrapetrol (NASDAQ: ULTR), which soared  79.75% during that time span.

A major reason contributing to the surge in the last four weeks has been the round of economic stimulus packages launched around the globe by central banks.  The most prominent was the announcement of Quantitative Easing 3 by Federal Reserve Chairman Ben Bernanke on September 13.  There have been similar measures from Europe and Japan.  These efforts are bullish for economic growth around the world, which the shipping industry needs to recover.  Based on the recent share price performance that is happening.

Also of significance was Beijing's announcement of a $156 billion economic stimulus package for China.  As the People's Republic is the world's largest importer of goods such as coal and iron ore that are transported by seaborne transport, that is a very positive development for shippers.  The Chinese stimulus spending will be focused on infrastructure projects, which require steel and other building products.

Falling fuel costs have also been beneficial for the shipping sector.  As with all companies in the transportation industry, fuel is a major expense for shippers.  The chart below shows the inverse relationship between the price of fuel and the performance of ship stocks.  Generally, as the exchange traded fund for oil, United States Oil, rises, the exchange traded fund for shipping, Guggenheim Shipping, sinks.


<img src="http://media.ycharts.com/charts/f0038e77585ac71b78db8183ea011144.png" />

SEA data by YCharts


Federal Reserve Chairman Ben Bernanke, who has been functioning as the global central banker, has declared that a low interest policy will prevail well into 2015.  That puts a premium on dividend paying stocks as those individuals and institutions seeking income turn from debt instruments to equities.  As the chart below reveals, many shippers have robust dividend yields that are much higher than the average of around 2% for members of the Standard & Poor's 500 Index.


<img src="http://media.ycharts.com/charts/610ec484cebe5156f39845559a36c961.png" />

CMRE Dividend Yield data by YCharts


While the economic performance in the United States, Europe and Japan is dismal, emerging market nations are still growing.  Even during The Great Recession, the middle class in emerging market countries around the world continued to burgeon.  This is still transpiring.  According to a recent study by McKinsey & Co., the global consulting firm, consumer spending by emerging market nations will reach $16 trillion by 2025, half the world's total.  That will increase the flow of goods across the waterways carried by shipping fleets.

The shipping recovery is further evinced by the Baltic Dry Index's performance.  The Baltic Dry Index, which "provides an assessment of the price of moving the major raw materials by sea. Taking in 23 shipping routes measured on a timecharter basis, the index covers Handysize, Supramax, Panamax, and Capesize dry bulk carriers carrying a range of commodities including coal, iron ore and grain."  Charted daily, the Baltic Dry Index  provides a gauge of the strength of the industry.  From its low of 647 in February of this year, the Baltic Dry Index is now around 766.

The shipping industry is a long voyage from totally recovering from The Great Recession.  Very telling for this is that the Baltic Index was as high as 4661 in 2009.  But the companies that have survived the economic storms of the past five years will be the ones best positioned to profit from the global recovery.  For long term investors, the share prices are very appealing, particularly those with a solid dividend income framework, as bullish conditions are forming for the shipping sector.


Fool blogger Jonathan Yates does not own any of the stocks mentioned in this article. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

blog comments powered by Disqus