| Undervalued
Shipping Stocks with Yields of up to 14.4% |
Published: July 20, 2006
Most of us go about our daily
routines without ever stopping to consider how the products that we
depend on every day make it to our cities and homes.
From the food that lines our
pantry to the cement that builds our roads to the gas that runs our
cars, all goods have to get from point 'A' to point 'B' -- whether by
land, air, or sea. Of those, we believe the companies that take the sea
route currently present some of the most compelling value opportunities
for today's investors.
Most shippers are categorized
according to what type of goods they transport. One of the first groups
that springs to mind is the Supertankers, which typically carry in
excess of 250,000 tons of crude oil. While companies that operate these
vessels have rallied nicely along with the recent spike in oil prices,
some still trade at extremely low valuation levels. For example,
Bermuda-based Frontline (FRO) currently sports a trailing P/E of just
5.0.
However, based on current
valuation levels, as well as favorable macroeconomic factors, the most
attractive stocks in the shipping space currently belong to companies
that carry cargo such as grain, iron ore, coal, forest products, and
cement -- the so-called "dry bulk" shippers. These types of
ships currently handle around 2.5 billion tons of cargo -- or more than
one-third of the world's ocean-based trade.
Until recently, dry bulk
shipping has long been considered a quiet, mature business -- well off
most investors' radar screens. In fact, during the 1990's, total
industry shipping volumes increased at just +2% per year.
However, that began to change
around the late 1990's and early 2000's, as booming economic expansion
in China and other emerging markets caused demand for shipping space to
skyrocket. From 1999 to 2004, the annual amount of dry bulk goods
shipped -- which is measured in tonnage -- increased by a full +25%. And
with limited fleet capacity available, the Baltic Dry Index (a proxy for
shipping rates) surged.
Not surprisingly, stocks in the
shipping industry followed suit -- with some racking up tremendous gains
of +400%, +500%, or more. However, this cyclical business has hit a
slowdown recently, and shares of most firms have fallen sharply from
their peaks. As a result, this corner of the market is now chock full of
value. In addition, the shipping firms we'll introduce you to below are
now offering dividend yields of 7%, 13%, and in some cases even 14% or
more!
And while the shipping industry
has generally enjoyed a strong run over the past several years, there
are several factors that lead us to believe the party can continue:
Supply:
- A significant percentage of
the world's shipping fleet was built in the 1980's. Most of these
ships are now reaching an age where they will need to be taken out
of service and replaced.
- Shipbuilders make more money
constructing oil tankers and containerships, so there is less
capacity available to build dry bulk vessels.
Demand:
- The Chinese economy is
growing at a torrid pace, and the country is busily importing
incredible amounts of raw materials for highways, bridges, and other
infrastructure projects.
- Last year, China imported
around 270 million dead-weight tons (dwt) of iron-ore -- almost
quadruple the 70 million it needed just five years ago. That
total is expected to rise to 305 million dwt in 2006, enough to make
nearly 400 million tons of steel. According to one analyst, if the
iron-ore used in China each year was stacked in the shape of a
football field, then it would reach a height of approximately 19
miles.
- The recent surge in oil and
natural gas prices has helped lift the price (and thus the shipping
costs) of coal -- which accounts for more than one-fourth of the
average dry bulk shippers' freight.
With all of the above factors
in mind, the dry bulk shipping industry is a great place to look for
undervalued stocks with solid long-term fundamentals. Here's a quick
look at some of the leading players in this industry, all of which are
trading at a sizable discount to their fair value . . .
Important Note: Throughout the
remainder of this article, editors Nathan Slaughter and Paul Tracy
provide a closer look at five high-yield shipping stocks that could be
poised to rebound off their recent lows. However, in
order to view the remainder of this article, you'll need to subscribe to
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Thanks for reading!
|
Nathan Slaughter
Editor
Half-Priced Stocks, The ETF Authority
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