In the list of "fallen angels" below, we focus on buy-rated stocks that fell sharply in the second q...
3 Shipping Companies Full Steam Ahead
03/27/2012 7:15 am EST
Shipping companies have been about as attractive as a series of rabies shots for a year or two, but now there are a handful that are starting to come back strong, writes George Putnam of The Turnaround Letter.
Shipping companies have been facing stormy seas—at least figuratively—over the last couple of years.
While there are a number of different subsectors of this industry based on the type of cargo (e.g. tankers, dry bulk, container ships, etc.), most have suffered from a glut of new ships and fluctuation in economic activity. As a result, the rates that most shipping companies can charge right now are at very, and in some cases historically, low levels.
This has pushed many shipping stocks down to at or near multi-year lows. While a rebound in shipping rates is far from certain, there are glimmers of hope on the horizon.
Although Europe may be facing a recession, economic activity in most other parts of the world is looking more solid. In addition, the current low rates are leading to more aggressive scrapping of older ships, and orders for new ships are being cut back.
Shipping is by its nature a very leveraged business—most ship owners borrow most of the cost of a ship purchase. This adds to the risk in shipping stocks, but also increases the gain potential if rates do improve.
Also, many of these stocks currently have very generous dividend yields, but it is not clear how sustainable they are unless rates do improve.
Capital Product Partners (CPLP)
This company was formed in 2007 to focus on the delivery of crude and refined oil and chemical products. It wasn’t the best timing for shareholders, as the ensuing worldwide recession decimated the stock.
However, the company has been aided by its affiliate, Capital Maritime & Trading, which has strong relationships with many of the world’s leading oil companies, commodity traders, and shipping companies.
From the time of its IPO in 2007, the company’s fleet has grown from 8 to 27 vessels of various sizes, with an average age of just four years. As a master limited partnership, most of the company’s earnings are passed through to shareholders, which accounts for the substantial dividend yield.
Diana Containerships (DCIX)
This firm was spun off from Diana Shipping in early 2011. As a freestanding container operator, Diana Containerships was able to begin operations with short-term contracts, thus not having to lock in low rate schedules. The company is also advantaged by not having purchased new ships at historically high prices.
The balance sheet is pretty decent. About 70% of available cash from operations is targeted toward the dividend.
Excel Maritime Carriers (EXM)
This shipper's specialty is transporting dry bulk cargo, including iron ore, coal, and grain, steel products, fertilizers, cement bauxite, sugar, and scrap metal. The substantial collapse in pricing for dry bulk transport has presented significant headwinds.
If rates stay at current levels, the company will need the help of its banks to stay afloat. But if rates turn up, there is significant gain potential in the stock. With insiders holding some 42% of the shares, management has a clear incentive to keep the company moving ahead.
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