I've been keeping my eye on the Claymore/Delta Global Shipping Fund (NYSE: SEA, $10.17) for over a month now. The fund invests in 30 of the world's premier shipping stocks -- firms that are paid handsomely to move oil, coal, iron ore, grains and other commodities and finished goods from one port to another.

The shipping sector was home to many of the market's star performers last year, with even the laggards posting gains of more than +100%. However, sometimes the biggest winners in a rising market end up being the biggest losers when the bottom falls out -- and that has indeed been the case here.

A month ago, this fund was tempting. The price was down and they had just announced a comforting $0.147 quarterly dividend. But I felt there might still be further downside risk.  And indeed, shipping stocks have continued sliding over the past few weeks. But I think we've now reached the point where any additional risk is dramatically outweighed by the potential rewards.

Much of the recent downturn in the shipping sector is attributable to signs of an economic slowdown in China -- which has a ravenous appetite for oil, coal and many other raw materials. Obviously, any type of economic contraction could slacken demand for these goods, and by extension dampen the need for shipping. To compound matters, Chinese officials have also instituted a damaging boycott of Brazilian iron ore over a disputed price hike.

However, Chinese steel makers can only rely on their iron ore inventory stockpiles for so long. Eventually they will have to bring in new supplies from Brazilian mines -- meaning increased demand for dry bulk carriers. Additionally, I think much of the slowdown in overseas trade has been exaggerated. Emerging markets like China have become key manufacturing hubs, and every day tons of raw materials have to be imported, just as finished goods are exported out to consumers around the world.

On the supply side, the credit crunch is making it tougher for shippers to have new vessels built. In fact, three shipyards in South Korea just had to halt the construction of 40 new ships due to lack of funding.

With all this in mind, I believe the Baltic Dry Index (a common barometer of global shipping rates) is poised to rebound from a recent five-year low. Remarkably, the index has plunged almost -90% over the past five months, a drastic overreaction.

And in any case, it's worth noting that many shippers have already locked up their vessels under long multi-year charters at steep rates, meaning they have little to no exposure to recent declines in the "spot" market.

Eagle Bulk Shipping (Nasdaq: EGLE) is a prime example. Despite the recent fall-off in shipping rates, the firm's revenues still jumped +26% last quarter, thanks entirely to fixed time charter revenues. And to give you an indication of demand, the firm is expecting 35 new vessels to enter its fleet over the next few years, and over 60% of this additional shipping capacity has already been spoken for.

Yet, thanks to this relentless selling pressure, the stock now trades at just three times forward earnings and offers a mammoth yield of 24%. And Eagle looks very similar to the rest of the portfolio. In fact, top holdings such as Diana Shipping (NYSE: DSX), Teekay Tankers (NYSE: TNK) and Euroseas (Nasdaq: ESEA) can all be had for earnings multiples below six and carry rich yields above 20%.

Shipping stocks have been struck by a wave of commodity-related selling. But keep in mind, the cash flows (and thus share prices) of this industry are influenced by the supply/demand dynamics of the shipping business -- not those of the underlying commodities. Whether oil is trading at $70 per barrel or $100 per barrel, much of it still has to travel by ship.

I think there could still be a fair amount of downside, but these stocks should be close to a bottom -- some are trading at just one or two times earnings and have very healthy growth forecasts. And during market rallies, the shipping group has seen powerful advances. With generous (and for the most part highly secure) dividend distributions and some of the most compelling valuations I have ever come across, shipping stocks are looking increasingly attractive in this market.
 

Nathan Slaughter
Editor
The ETF Authority

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About Nathan Slaughter

Nathan Slaughter has developed a long and successful track record over the years by investing in both exchange-traded funds (ETFs) and deeply discounted value securities. When it comes to ETFs, Nathan has created a proprietary ranking system that helps him zero in on today's most promising funds.

Nathan's previous experience includes a long tenure at AXA/Equitable Advisors, where he provided comprehensive investment advisory services to small businesses and high net-worth clients. He also honed his research skills at Morgan Keegan, where he performed asset allocation, retirement planning, and consultative portfolio management services.

Several years ago Nathan switched gears and decided to devote his time exclusively to financial analysis and writing. He has since published hundreds of articles for a variety of prominent online and print publications, and he now writes exclusively for StreetAuthority.com.

Nathan's educational background includes NASD series 6, 7, 63, & 65 certifications, as well as a degree in Finance/Investment Management. He currently resides in Shreveport, LA with wife Julie and sons Aidan and Riley. 

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