Dry Bulk Shipper Surge is 'Transitory', 'Should Reverse' - Wells Fargo (DRYS) (ESEA) (SALT)

November 16, 2016 8:45 AM EST
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Price: $0.32 --0%

Rating Summary:
    5 Buy, 5 Hold, 1 Sell

Rating Trend: = Flat

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    Up: 30 | Down: 30 | New: 23
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Wells Fargo analyst Michael Webber weighed in on the wild action seen in the shipping stocks. Webber notes the dry bulk sector is up 378% over the last 5 days, led by DryShips (NASDAQ: DRYS) +1501%), Euroseas Ltd. (NASDAQ: ESEA) (+ 267%), and Scorpio Bulkers (NYSE: SALT) (+51%).

Webber notes while the downtrodden Dry Bulk names saw more dollar-weighted volume yesterday than they've seen in the past month, Container coverage (up 35.1%), Marine MLP coverage (up 8%), Tanker coverage (up 8%), and US Marine coverage (up 7%) have all also outperformed the market.

Webber attempts to answer the question "What The‎ Heck Is Going On?" Here's his take:

  • 1) Trump Rotation Trade: We think we're seeing the continuation of the Trump Rotation trade--into riskier, energy related assets. We believe the bulk of these moves are general and high level in nature. More on this below.
  • 2) Retail Momentum Driving The Dry Bulk Bus. We’re seeing significant retail momentum within Dry Bulk, which has become a self-perpetuating cycle in recent days. While Dry Bulk day rates are up (Capesize spot rates are up 38% to $16,400/day, likely above cash breakeven for most at this point), no fundamental move has supported this degree of upside in our view. While there’s momentum around the coal trade (both from a Trump read-through, and from higher steel pricing/met coal demand), we believe both are likely overstated.
    • a. For big movers like DRYS (up 1501%), DCIX (up 178%), and ESEA (up 267%), specifically, we note platforms that tend to specialize in retail trading/aggregating made up more than 53% of the average trading volumes in those names‎ since Thursday (11/11) (with the actual total retail volume likely significantly higher when considering the retail flow from larger banks/platforms). In short, we think there’s been a mini-virtuous cycle in play, in which (1) a new positive (amorphous) theme arrives (Trump), which drove short covering and a risk-on rotation, which was (2) picked up on (in a big way) by retail investors, which (3) led to more short-covering, and more retail momentum, particularly for sectors like Dry Bulk, which were at depression level depths. Please see our trading volume charts on Page 2-3.
    • b. For us the first word that comes to mind when we see this kind of performance in Dry Bulk/Containerships: Transitory. We do not believe this lasts, and should reverse. That said, we think the move is too severe to try and short (at least for now).‎

Other stocks not mentioned in the report: Eagle Bulk Shipping (NASDAQ: EGLE), Diana Containerships (Nasdaq: DCIX), Seanergy Maritime (Nasdaq: SHIP), Top Ships (Nasdaq: TOPS), Sino-Global Shipping America (NASDAQ: SINO).

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