Trading in Bulk

Home Gamers have been asking Cramer about dry bulk shipping stocks for some time, but he always turned up his nose.

There’s a reason, though. For most of Cramer’s trading career, dry bulk shippers just weren’t making any money.

Well, things have changed.

Globalization has these ships traversing the earth, bringing coal, iron ore and grain from the Americas to Asia. Since shipping companies get paid by the day, the longer the trip, the more revenue they earn.

The limited number of ships helps boost the rate too. It’s simple supply and demand: The margins on building the ships are low, so companies choose not to expand their fleets. Now there are fewer ships to meet the rising demand. Hence, the higher rates.

If an investor wants to own a dry bulk shipping stock, the key is to get in before the company announces a dividend, Cramer said. Shippers are classic big dividend stocks, so an announcement is most likely only a matter of time.

Two companies to watch are Oceanfreight and Star Maritime. Both are new to the industry; so much so that OCNF is operating with less than half its anticipated fleet, and SEA doesn’t even have one ship yet. But these circumstances are only temporary, Cramer said. Neither has yet to announce a dividend either.

Oceanfreight is 100% contracted out for 2007, 88% for 2008 and 60% for 2009. The company is expected to have a yield of 9.2% yield.

SEA should get its first ship once it changes its place of residence and the others within two months of that date. The company is moving to the Marshall Islands. The expected yield: almost 10%.

Now, the yields should decline once these companies start paying their dividend. It’s the inevitable result of their respective stocks going higher. (Dividend payment divided by share price equals dividend yield.) Cramer figures that if the yields of OCNF and SEA drop to the industry standard of 5.9%, that’s 50% to 60% upside in the stock price. According to those calculations, OCNF is a $34 stock masquerading at $22. SEA should come very close to $22 even though it’s presently at $13.

Bottom Line: The trick to dry bulk shipping is getting in before the dividend, and that’s why Cramer likes OCNF and SEA.

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