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A Bargain Opportunity Not Seen Since 2009

Monday, 27 Jun 2011 08:34 AM

By Tom Hutchinson

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"Be fearful when others are greedy and greedy when others are fearful." Now is one of those times that this investment advice from the great Warren Buffet can be used to great effect.

The recent barrage of bad economic news and the ensuing market downturn have created opportunities not seen in a long time. In fact, there are bargains not seen since 2009.

But employing Buffet's advice and being greedy when others are fearful can be quite difficult. After all, it's not easy to defy conventional wisdom and invest in something many investors have been running from — especially so close to the financial crisis.

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With news on the economy bad and getting worse, opportunities have developed in cyclical stocks – stocks that perform well when the economy is strong. Many of these stocks have taken it on the chin recently.

Among the most cyclical stocks of all are those of companies involved in the shipping industry. In fact, one of the best historical leading indicators of the economy is the Dry Bulk Index (DBI). The index provides average daily prices for shipping of dry goods (coal, iron ore, grain) throughout the world. Since many industrial raw materials are shipped, the index is considered to be indicative of future industrial output and economic activity.

The DBI has been on an unbelievable rollercoaster ride over the past few years. It surged to near 12,000 in 2008 and plummeted 94 percent later that same year to less than 700 when the financial crisis took hold. The index recovered somewhat to 4500 during the recovery but has tanked again to about 1400. It serves as one of the many leading economic indicators pointing sharply downward.

Not only have shipping stocks plummeted along with the price of shipping rates, but other factors have also been wearing on the industry.
As shipping prices soared in the past decade as a result of increased traffic from emerging markets, shippers fell all over each other to expand existing fleets – causing a flood of new ships on the market.

Increased supply combined with a slower global economy has really knocked down the price of shipping companies.

But the new ships are getting absorbed into the market and now could well be the low point of the year in terms of the global economy.

While the market may not have bottomed, certain shipping stocks are selling at historically low valuations and paying sky high yields. As well, a select few shippers are well prepared to weather a continued downturn.

One such company is Navios Maritime Partners (NYSE: NMM). This multinational Greek shipping company transports bulk cargo such as grain, coal, ore and cement to destinations throughout the world.

Because NMM is a limited partnership, tax advantages enable it to pay a stronger yield than most companies – currently a whopping 9.4 percent.

Over the long term, shipping prices should go higher as China, India and other emerging markets continue to industrialize and international trading activity continues to increase. The same dynamics that drove the DBI to 12,000 should apply again.

However, the short term is more of a question as shipping rates may not have bottomed yet. However, Navios has the short term pretty well covered.

Navios already has 91 percent of available days on its vessels already chartered out for 2011 and 58 percent for 2012 at predetermined rates much higher than the current rates. The company continues to expand its fleet in a way that is accretive to earnings and its current 9.4 percent yield is well covered and well secured with predictable revenues.

Navios has fallen more than 16 percent from its high. The stock currently sells at a low valuation, pays a high yield, and has an excellent chance to move up when the economy improves.

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