Stocks ended the first week of the new year on a high note, with the Dow gaining 0.3%, to cap its best week since December 2011. Not to be outdone, the broader S&P 500 rose 0.5% today, to close at a five-year high.

Follow-up
This morning's column contained a warning concerning "safe" bonds. Since then, CNBC reported that Goldman Sachs issued a client note that highlights the risk in bonds. Equity strategist Robert Boroujerdi writes:

A reversion of risk premiums to historical averages of 6% nominal rates (3% real rates and 3% inflation) would suggest estimated losses in portfolios with bond durations of 5 years of 25% or more.

Shipping stocks
On Tuesday, the Financial Times reported that a number of private equity and hedge fund managers have been buying up debt and, in some cases, hard assets tied to the troubled shipping industry. In one deal, for example, the private equity arm of Oaktree Capital, the distressed investor led by Howard Marks, bought $800 million of shipping loans at a steep discount from Lloyds, the insurance syndicate. Is this is a signal that investors should be looking at the common shares of shipping firms, as well?


At 700, the Baltic Dry Index (BDI) is not much above the all-time low of 647 that it achieved in February of last year, going back to the inception of its predecessor index, the Baltic Freight Index, at the beginning of 1985. The BDI remains 94% below the high of 11,793 that it achieved in May 2008. Published daily by the Baltic Exchange in London, the BDI tracks the price of moving major raw materials (coal, iron ore, grain, etc) over 20 key bulk routes.

The shares of nearly all publicly-traded shipping firms have inflicted horrific losses on investors over the past five years; in some cases, exceeding the decimation of the BDI! Witness DryShips and Excel Maritime Carriers , with losses of 98% and 99%, respectively.

In that context, are the shares now cheap? Many of the firms are expected to be loss making over the next 12 months, so they're missing a price-to-earnings (P/E) ratio. However, it's possible to calculate a cyclically adjusted P/E, using a trailing average of inflation-adjusted earnings-per-share over the prior 10 years instead of a forward earnings estimate. On that basis, some of the shippers certainly look tantalizing: Dananos and Diana Shipping are valued at less than five times cyclically-adjusted earnings. In the case of DryShips and Excel Maritime, the ratio is less than one.

As Howard Marks wrote to his investors in March 2006:

Even if we can't predict the extent of cyclical fluctuations it's essential that we strive to ascertain where we stand in cyclical terms and act accordingly.

Some of the numbers above suggest that the shipping sector is at or near the trough of its cycle. Investors with a taste for distressed or cyclical assets may want to consider acting accordingly.

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The article Shipping Stocks: Navigating the Cycle originally appeared on Fool.com.

Alex Dumortier, CFA has no position in any stocks mentioned; you can follow him @longrunreturns. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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