Unique Investment Opportunity in a Market Dominated by Money Printing
With the introduction of monetary stimulus by many central banks around the world, a common question asked is: what’s a unique investment opportunity in a market sector that is not immediately obvious to the average investor?
If the global stimulus really begins to work, it should result in higher demand for commodities. If this occurs, an interesting market sector that might be an above-average long-term investment opportunity is the shipping industry.
Information just released shows that Greek shipping firms have recently ordered the most iron ore carriers since 2008. Greek shippers own a large number of vessels internationally. (Source: Sheridan, R., “Greeks Bet Ship Rout Ending With Most Orders Since 2008: Freight,” Bloomberg, April 30, 2013.)
While the average earnings per day for a Capesize ship (a type of cargo ship used to transport raw commodities) is only $4,900—a massive drop from the peak in 2008 of $229,000—many analysts are expecting this current level to be a bottom and are expecting earnings to increase to $17,500 per day next year.
Clearly, the Greek shipping market sector sees an investment opportunity over the next few years. From the time of ordering to delivery, the process of obtaining a carrier takes approximately two years. However, because of the economic slowdown, the costs of construction and secondhand sale prices have dropped precipitously.
As an example, a new ship that used to cost approximately $100 million to build in 2008, now costs only $47.0 million. Prices are even lower on the secondhand market sector for large ships, and some shipping firms see this time as an investment opportunity and are using the low prices to their advantage.
Diana Shipping Inc. (NYSE/DSX) paid only $27.0 million for a secondhand vessel, a substantial amount of savings from the approximately $58.0-million price tag for a new vessel of this kind. (Source: “Review on Maritime Transport,” United Nations Conference on Trade and Development web site, last accessed May 1, 2013.)
The stock chart for Diana Shipping is featured below:
Chart courtesy of www.StockCharts.com
Investors also believe that there might be an investment opportunity in the shipping market sector, looking out over the next three to five years, because prices have recently begun to move up from multiyear lows.
Diana Shipping has broken a long-standing downtrend resistance line, since investors believe the bottom might be in for the shipping market sector. While the firm might be getting a great deal in acquiring new and used ships, we are not seeing growth in revenues, as data rates still remain quite low.
However, much like a large vessel at sea, it takes a long time for the shipping market sector to turn. But when it does begin to turn, prices will begin to move up. It appears that Diana Shipping is preparing for the turn in the rates it can charge by expanding its fleet, anticipating a rebound in commodities over the next few years.
If you believe that monetary stimulus will re-ignite the commodity cycle once again, then it should be easy to also believe that the rate shippers charge for transport will move up as well. One can certainly use the shipping market sector to create an investment opportunity that is leveraged off the continuation of the commodity super cycle, as these stocks can certainly move a significant amount.
If you look at the move in Diana Shipping from the lows in 2006 until the peak in 2007, this was a huge percentage return. I do not think that Diana will hit that peak level anytime soon, as there are still a massive amount of shipping vessels and a slow global economy, which will prevent a massive rise in the prices charged by the shipping market sector over the short term.
However, one certainly can’t ignore the technical situation that other investors are putting their money where their beliefs are, seeing a substantial investment opportunity in the shipping market sector and buying a significant number of shares. If they are right that shipping rates have bottomed, this could be a great long-term investment.