On Wednesday’s Mad Money, Cramer offered Home Gamers two ways to play the quiet bull market in dry bulk shipping.
He based his picks – Paragon Shipping and Diana Shipping – on the ups and downs of the Baltic Dry Index, which is the indicator used to figure out what companies pay for bulk shipping.
Paragon, Cramer thinks, is a less risky play because its entire fleet of ships has already been contracted out at a set rate. Diana, on the other hand, will be renewing the leases on eight of its ships come April 2008, and that should allow the company to lock in higher rates in the not–too-distant future – provided that’s the direction the index is headed. But Cramer thinks it is.
The key to investing in a shipper with a fully booked fleet is getting in before the company has declared its dividend, Cramer said. Dry bulk shippers pay massive dividends because their companies tend not to be big growers, so reinvestment usually isn’t an option.
And these stocks are usually valued based on their yields, and often times there’s hefty upside when they announce those yields. Paragon expects to pay a $1.75 annual dividend, or a 7.3% yield. Since these stocks rarely yield more than 8% or lower than 6%, Cramer used those numbers to calculate the upside/downside potential for Paragon, which is trading at $24 right now: up to $29 or down to just under $22.
We already mentioned that Diana has the chance to lock in better rates next spring when the leases on part of its fleet ends, but there’s another reason Cramer likes the stock so much. DSX just completed a secondary offering and the stock is up another $8. Usually, simple supply and demand would dictate that flooding the market with new stock would drop the price. So the fact that DSX shot up should be a sign of strength.
Cramer’s bet is that DSX uses the money from that secondary to grow its fleet, and as a result the company, even more. So growth should be in Diana’s future. Cramer said the up/down on DSX, which is trading about $34, is $11 up, $2 down. Tack on that 6% yield and investors have a stock that’s “irresistible,” he said.
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