During the bull market in commodities that peaked midway through 2008, shipping companies that transfer base commodities across the oceans enjoyed phenomenal runs to all-time highs before fizzling out like a Roman candle.
Companies that carry wheat, corn, soybeans, fertilizer, cement, iron ore pellets and sugar were printing money as the day rates for shipping dry commodities soared.
The rate charged by dry bulk shipping companies to buyers of commodities abroad, as measured by the Baltic Dry Index (BDI), began 2008 at roughly $5,800 per day. The rate topped out at $11,700 midyear, and bottomed out in early December at $675 -- a 94% correction. Absolutely unbelievable!
Shares of the most widely traded stock within the dry bulk shipping sector, DryShips (NASDAQ: DRYS), traded as high as $116 in May, reflecting the fullness of the commodity rally that seemed to be irreversible based on the glowing projections of China, India, central Europe and what are now known as "Frontier Economies," like Vietnam and Indonesia.
Following that meteoric rise in shares of DRYS to $116, the stock proceeded to careen all the way down to $3 in November.
But if you went long at this November low, you saw shares of DRYS rally back up to $12 -- a four-fold move on your trading equity -- in less than a month. What's not to love about that?
The stock was trading at a P/E of less that 1 based on radically lowered adjusted forward earnings estimates, making this one of the great winners for the deep value investors and traders that knew DRYS would one day again set sail at much higher prices.
Bryan Perry is a contributor to OptionsZone.com.
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