There are times when a sector is so hot, or about to be, that you just need to throw out the CAPM math and buy the stocks. The Market seems to think that applies to all sectors in today's trading, but that is a recipe for sadness. To create relative performance, or alpha, you have to overweight some sectors and underweight others. It is as much an art as it is a science. Just pay attention.
One such sector is dry bulk shipping. I first started following this sector in the 2005-2006 time period, and rode these names to some terrific performance in 2006-2007 before running for the hills as Lehman crashed in 2008. It is a heavily cyclical industry. These are not long-term "set it-and- forget it" names. You want to watch the industry and watch what managements are doing.
I have mentioned the extraordinary rise in natural gas prices, especially in Europe and Asia, in my RM column before. I have pointed readers toward the companies that ship natural gas from where it is produced to where it is consumed. Flex LNG (FLNG) is still my favorite there.
As stories of fears of natgas shortages and rationing heading into the Northern Hemisphere winter are dominating the news, I am always on the lookout for other commodities that are in short supply but with rising demand. If a utility can't produce power with natural gas (which only has one carbon atom, CH4) and it continues to deal with the painful intermittency of wind power, there really is only one other option. Coal. Yep, dirty coal.
As Steag's Bergkamen-A plant in Germany recently quite literally ran out of coal and China has once again began offloading coal shipped from Australia, the lights are flashing green for coal. But, much like natgas, most of the consumption is on different continents where it's produced. And with the exception of Joe Manchin, seemingly the only sane man in Washington these days, no one wants to produce any more coal. Anywhere.
First, check out the Baltic Dry Index. I am not going to waste your time with some ridiculous come on like. "it's the best economic indicator you have never heard of '' or something like that. If you are smart enough to read RM, you are likely aware enough to know that shipping rates are a real-time indicator of global conditions.
Check out this chart from Trading Economics, which delineates the movement of the Baltic Dry Index, here, which comprehends all ship sizes. Good Lord! Straight up!
Existing producers are going to keep digging up this black gold and loading it onto rail cars for shipment to China and Europe. This shipment occurs via dry bulk ships. The classic definition for the largest bulkers (Capesize) is that they carry coal, iron ore and grains. Smaller ships (panamax, supramax, etc.) have more widely-varied uses. But the market is driven by the big boys, and Capesize rates are going nuts.
Fearnleys is a great source here. From their most recent report:
Another amazing week for the Capesize market. The average of all baskets is up by 16% adding another USD 11,994 per day to the daily average, now at USD 86,870 per day.
So, how to play? Much like natgas, futures-based ETFs like the United States Natural Gas Fund (UNG) or even the futures contracts themselves frankly scare the hell out of me. So I am very pleased that the smart folks at ETFMG have created a dry bulk futures (FFAs) ETF. The symbol for Breakwave Dry Bulk Shipping is (BDRY) .
BDRY has been turbocharged of late, but, as I said, futures contracts do scare me, so I usually stick with the companies. Eagle Bulk Shipping (EGLE) , a stock I first bought in 2005, but haven't owned for a while, announced Monday a refi that will facilitate a share repurchase and the re-initiation of a dividend. That's what you do when your end market goes nuts. You give it back! Shareholders love that, and, believe me, having ridden these names for about 18 months in the mid-aughts, it still feels like early innings for the 2021 Dry Bulk Boom.
As I have mentioned in several RM columns, I have always been a big fan of the Navios team, (NM) and (NMM) (which recently merged with another Navios entity, (NNA) ) will be run to perfectly time these markets. Navios' CEO, Angeliki Frangou, is someone I always follow. When she is buying... you should be, too.
It's time to be overweight dry bulk shipping. Get on that!