We have been following the shipping sector for some time now and we cannot help but notice the bullish build up in a number of shipping stocks. Perhaps the smart money has woken up to the extremely cheap valuations of shipping stocks and the strong bottom formation in many counters. Members of the ETF SEA hardly appear to have demanding valuations with the average p/book of 0.95, p/sales 0.82, p/cashflow of 5.40, and dividend yield of 6.84%.
Many analysts have noted the poor earnings outlook for shippers and the excess capacity that exists. We would urge you to note that the excess capacity may well disappear a lot sooner than the crowd expects given the dramatic improvement in scrap steel prices. When scrap steel prices are low (during depressed economic conditions) ships tend to be laid up rather than scrapped which gives a perception of a capacity “overhang”.
Be that as it may the ETF SEA has been locked in a rather tight trading range since late May last year, there has been ample time for the bears to take shipping stocks lower but for whatever reason they seem unable to do so in light of some of the worst trading conditions for shipping companies in modern history. Furthermore, the trading range has been gradually getting tighter with a series of higher lows. This suggests that the next big move will likely be to the upside and given that the trading range is some 7 months old the breakout is likely to be rather dramatic!
