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