There have been a number of reports that should have investors bullish on shipping stocks such as Frontline (NYSE: FRO), DryShips (NASDAQ: DRYS), and Eagle Bulk Shipping (NASDAQ: EGLE) (chart below), among others.
During The Great Recession, the shipping industry was battered by a “perfect storm” of adverse market conditions. Shippers overbuilt due to strong demand at the time. A tremendous amount of money was borrowed to finance the new construction. When that collapsed with The Great Recession, so did shipping rates.
Rising when all this was happening was fuel costs.
Fuel expenses are about 40 percent of the total cost of a shipping company. The debt load was staggering, too. As a result, many shippers went bankrupt. The stock prices fell for others.
But there are bullish factors ahead.
Economic growth is returning around the world. As a result, hedge funds, private equity groups, and other institutional investors are starting to invest in the shipping sector. This is being done in anticipation of greater amounts of commodities such as coal, iron ore, and others being transported around the world’s waterways. Investors would be wise to invest in the industry across a wide range of companies. That will be a prudent form of risk management in a volatile sector.
It would also be wise to focus on companies with as little as debt as possible. Until the sector recovers, debt should be avoided. The entire shipping industry is not going under. The recovery will be strong. A broad-based approach to the group is, by far, the best way to proceed.