By Justin Spittler
“This is easily the best investing opportunity I’ve seen in months.”
That’s a direct quote from an analyst in my office.
You don’t know this man. He works behind the scenes.
But make no mistake. He knows stocks. I actually consider him something of an investing genius.
When he finds a great investment opportunity, I'm usually the first to hear about it.
About a week ago, he called me over to his office and showed me several ugly stock charts.
This was the big-money opportunity he was telling me about…
I was skeptical. So, I started asking questions.
When I left his office, I was convinced…
• This is one of the best opportunities I’ve seen in a long time…
And I want to share it with you.
Let's start by looking at those “ugly charts.”
The first one shows the performance of Star Bulk Carriers Corp. (SBLK), a major dry bulk shipping company. This company transports raw materials by sea.
You can see this stock started plunging in 2007, and never recovered.
It’s now trading 99% below its all-time high.
It’s not the only major shipping company that's nosedived, either.
Here’s a chart of Golden Ocean Group Limited (GOGL). It’s down 96% from its record high.
Finally, here’s a chart of the Guggenheim Shipping ETF (SEA), which tracks the performance of 27 shipping companies. It’s down 57% since 2010, which is when the fund went public.
• You’re probably wondering why on earth my friend’s so bullish on shipping stocks…
After all, some shipping stocks have plunged more than 95%.
Most investors won’t buy anything that's down 50%, let alone 95%.
But we're not like "most investors." We like to buy industries and stocks most people hate. This allows us to scoop up world-class companies for almost nothing.
Plus, Casey Research founder Doug Casey says any industry down 90% or more deserves a look.
So, today we’re going to take a deep dive into the shipping industry. By the end of this essay, you’ll know if shipping stocks are right for you.
But you need to understand something first…
• The shipping industry is extremely cyclical…
It experiences booms and busts.
Between 1999 and 2008, the industry had a spectacular boom.
The Baltic Dry Index (BDI)—which measures the cost to ship raw materials by sea—surged more than 14-fold during that period.
This meant companies were making a lot of money on every shipload. Business was booming.
Then, the global financial crisis hit.
• Global trade practically came to a screeching halt…
Shipping rates fell off a cliff.
The BDI plunged 94% in just seven months.
Soon after, rates rebounded…only to start falling again in 2010.
Last February, the BDI hit an all-time low of 290. That’s 98% below the all-time high it set back in 2008.
• Low rates pummeled shipping companies…
Profits tanked. And at least a half-dozen dry bulk shipping companies went bankrupt between 2008 and 2010.
Unfortunately, low rates have stayed low for the better part of the last decade.
That’s because many shipping executives thought the good times would never end.
During the last boom, they ordered too many ships. They borrowed too much money.
In short, they set themselves up for disaster.
According to the Baltic and International Maritime Council (BIMCO), the average fleet size grew 8.6% per year from 2007 to 2015. Demand grew just 4.5%, or about half as fast, during that period.
The combination of too many ships and not enough shipments has kept rates low…until recently.
• The BDI has surged 196% since last February…
That’s an enormous move.
It’s sparked a huge rally in beaten-down shipping stocks.
Just look at the chart below. It shows the same two shipping stocks I talked about earlier. You can see that GOGL’s doubled since last March. SBLK has tripled.
• Almost no one is talking about this…
We can’t say we’re surprised, though.
Most investors have short-term memories.
When an industry implodes like dry bulk shipping has, they move on. They forget about the huge gains it delivered during the last boom.
But we never forgot about the industry.
We understand that dry bulk shipping is crucial to the global economy. And we can’t imagine a world where countries completely stop trading with one another.
That tells us the industry will eventually rebound.
• Now that the industry’s finally showing signs of life again, shipping stocks are on our radar…
But that doesn’t mean you should blindly invest in shipping stocks.
After all, the industry still has too many ships and too much debt. Plus, shipping rates are still historically low.
The good news is that these problems aren’t nearly as bad as they were a few years ago.
More importantly, rates and shipping stocks are on the rise. That’s a very good sign.
After all, markets almost always price in good news before you read about it in the newspaper.
• If you want a shot at explosive gains, you should act soon…
Just remember that shipping stocks aren’t for the faint of heart.
If you buy them, treat them like a speculation.
Only invest money you can afford to lose. Don’t bet your life savings. If you want to learn how much money to put into a speculative opportunity, read this timeless essay from Doug Casey.
Limit your downside. You can do this with stop losses. These will automatically sell a position if it falls below a certain point. With something as volatile as shipping stocks, use a 50% trailing stop.
Take profits when you get them. If you buy a shipping stock that doubles in value, consider taking a “Casey Free Ride.” That’s when you take your original investment off the table and let your profits ride. It’s basically a risk-free way to speculate.
These simple strategies allow you to speculate while preventing catastrophic losses.
If you aren’t made for speculating, wait for the industry fundamentals to improve before diving in. We’ll let you know when that time comes.
Chart of the Day: Bet on Defense
Defense stocks are ripping.
Today’s chart shows the performance of Lockheed Martin Corporation (LMT). Lockheed is a major defense company. It's best known for making fighter jets.
As you can see, Lockheed Martin recently broke out to record highs. Today, it hit a new all-time high.
It’s not the only major defense company that’s rallying, either.
Raytheon has jumped to a record high. Boeing, another airplane manufacturer, is also up big since Election Day.
Over the past week, President Trump said he wants to increase government spending by $54 billion. He doubled down on this pledge during his address to Congress last night.
If Trump keeps his promise, defense stocks could head much higher over the next four years.
Delray Beach, Florida
March 1, 2017
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