Tonight I am introducing a new series I will be revisiting every so often called the sector in focus. In these posts I will look at a sector that is in the news and explain why it is in the news, and provide a breakdown of some of the stocks in the sector. I will take a look at fundamentals and valuation as part of my sector review.
The drybulk shippers have had a run that is nothing short of amazing. DryShips Inc. (Nasdaq:DRYS) has risen from about $17 at the beginning of the year to a current level of $105.92. The stock has gone up more than 600% since the beginning of the year. Excel Maritime Carriers (NYSE:EXM) and Diana Shipping Inc. (NYSE:DSX) have also had similar runs.
So what has been behind the huge run in these stocks? The drybulk shipping rates have risen dramatically in the past few quarters. The drybulk shipping companies have been able to make money hand over fist as margins run at historical highs. The demand for iron ore, coal, and agricultural products is largely behind the rise in the drybulk shipping rates. This sector has also been seen as a China play because of China's amazing demand for these products, which has clearly helped the sector of late.
The reason I wanted to profile these stocks is that over the past couple of trading sessions these stocks have been hit very hard. DRYS, DSX, and EXM were all lower by at least 7% today alone.
Will these stocks continue to defy gravity or will they come back to earth? Well I must say that while the intermediate term growth prospects still look good, I'm afraid that the valuations here have gotten out of hand. For a sector that has in the past generally grown by just about 5% or so to sustain 50-100% growth for long is simply not very reasonable. It is likely that increased competition will slow growth substantially over time, because this sector has never proven to have any major barriers to entry. The spot rate is likely to turn down at some point in the next year or two as drybulk carriers become more abundant.
The fact is, drybulk has been the place to be because of tremendous growth, but I wouldn't want to be betting on these stocks at these levels.
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You're right about a lot of it but wrong about the competition. The barriers to entry are HUGE. Literally. Try getting your hands on one of these huge carriers. The supply of carriers being so low and demand for the bulk commodities being so high is what has driven the dry index up, right? How has that changed? It hasn't. The only volatility is due to China refusing to pay the high spot prices. I guess we'll see who wins which will be a testiment to what kind of power China can wield in which industries.
Posted by: skeptic | November 6, 2007 3:27 PM | Permalink to Comment