Ignored for some time now, the Baltic Dry Index, a gauge of shipping costs for several raw materials, is becoming relevant once again. Considered to be one of the most dependable measures of global growth at one point, the index fell out of favor when the Great Recession hit the world economy and consequently, the shipping industry.
The index has surged considerably over the last month even as market watchers are revising their opinion about the shipping business. Prominent industry members surged on Tuesday and with prospects looking bright, this may be a good time to bet on the continuing success of shipping stocks.
Baltic Dry Index Sails North
The Baltic Dry Index is a gauge of the shipping costs of raw materials such as iron ore, coal and grain. The index moved higher on Wednesday, gaining 4%, to hit a two year high. According to FactSet, the index has gained in excess of 55% during this month and around 39% on a year-to-date basis.
A section of analysts point out that the index often moves higher due to the Lunar New Year effect. However, economists at Panjiva Research discount the seasonal boost and believe that this catalyst petered out around the middle of last month. Instead, they think that the surge represents a fundamental and positive shift for global economic prospects.
In fact, in 2008, the index was providing strong indications about the economic disaster that was to come. The Baltic index nosedived during the spring of that year, continuing to move lower in the summer when the crisis finally struck home. However, in the aftermath, the discovery of the extent of the oversupply in cargo vessels led to the discrediting of the index as a signature metric for the global economy's health.
Why Are Dry Bulk Shippers Surging?
The reversal in the Baltic Index's fortunes arrives at a time when analysts are taking an optimistic view of the now long suffering shipping industry. Stocks of companies from this sector gained favor on Tuesday after analysts at Morgan Stanley (MS) revised their opinion about them. Several of these stocks were upgraded while their price targets were raised substantially.
The logic behind this reassessment was that the dry bulk market had already hit rock bottom and was now on an upward trend, ready to rake in profits. One reason for this uptrend was the deceleration in long term fleet growth, estimated by Morgan Stanley at around 1%. Meanwhile, prices for Chinese iron ore and steel have surged 65% even as freight rates continue to languish at historically low levels. Now, these rates are likely to move upward for another two years.
Meanwhile, China's infrastructure spending, which accounts for around 25% of the country's demand for steel, is likely to increase substantially in the near future. Additionally, China's steel sector has become increasingly reliant on imports given that output is falling and scrap melting furnaces are facing closure. Moreover, China's demand for high grade ore continues to rise.
The Baltic index's upsurge and gains for shipping stocks indicate that the sector is likely to witness better times in the immediate future. Fleet rationalization and a concurrent increase in import demand, particularly for iron ore, means that this trend is likely to continue, at least into the medium term.
Picking select stocks and related choices gaining from these trends looks like a smart option at this point. We have narrowed down our search based on a good Zacks Rank and other relevant metrics.
Performance of Stock Picks vs. Shipping Industry YTD
Aegean Marine Petroleum Network Inc. ANW is a marine fuel logistics company that physically supplies and markets refined marine fuel and lubricants to ships in port and at sea.
Aegean Marine Petroleum projected growth for the current year is 21.5%. Its earnings estimate for the current year has improved by 6.7% over the last 30 days. The stock has returned 18% year to date, outperforming the Zacks Transportation - Shipping sector, which has gained 9.2% over the same period. The stock has a Zacks Rank #1. You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here.
Genco Shipping & Trading Limited GNK is a ship owning company which transports iron ore, coal, grain, steel products and other drybulk cargoes along shipping routes.
Genco Shipping & Trading has a Zacks Rank #2 (Buy) and its projected growth for the current year is 90%. Its earnings estimate for the current year has improved by 11.2% over the last 30 days. The stock has returned 66.5% year to date, outperforming the Zacks Transportation - Shipping sector, which has gained 9.2% over the same period.
Golden Ocean Group Limited GOGL is a shipping company which engages in the transportation of dry bulk cargoes.
Golden Ocean Group has a Zacks Rank #2 and its projected growth for the current year is 39%. Its earnings estimate for the current year has improved by 50% over the last 30 days. The stock has returned 65.2% year to date, outperforming the Zacks Transportation - Shipping sector, which has gained 9.2% over the same period.
Orient Overseas (International) Limited OROVY through its subsidiaries operates as a provider of container transport and logistics services.
Orient Overseas has a Zacks Rank #2 and its projected growth for the current year is 88.2%. Its earnings estimate for the current year has improved by 30.6% over the last 30 days. The stock has returned 45.1% year to date, outperforming the Zacks Transportation - Shipping sector, which has gained 9.2% over the same period.
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Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report Genco Shipping & Trading Limited Warrants Expiring 12/31/2021 (GNK): Free Stock Analysis Report Golden Ocean Group Limited (GOGL): Free Stock Analysis Report Aegean Marine Petroleum Network Inc. (ANW): Free Stock Analysis Report Orient Overseas International Ltd. (OROVY): Free Stock Analysis Report To read this article on Zacks.com click here. Zacks Investment Research