Despite its importance in signaling current global growth trends, the Baltic Dry Index is hardly talked about by financial media pundits. It’s not as sexy as Fannie Mae (FNM), Freddie Mac (FRE), AIG (AIG) or even other consumer plays such as Procter & Gamble (PG) or Wal-Mart (WMT).

The index, which covers dry bulk shipping rates and is managed by the Baltic Exchange in London, is an assessment of the price of moving the major raw materials by sea. Taking in 26 shipping routes measured on a time-charter and voyage basis, the index covers supramax, panamax and capesize dry bulk carriers carrying a range of commodities, including coal, iron ore and grain.

Basically, it is an index that signals how global trade and growth are currently faring. And with the index down the majority of the last month, many market participants feel that global growth is indeed slowing.

So what does this mean for the market?

On Stockpickr.com, we created the Baltic Dry Index 101 portfolio, which looks at stocks most dependent on the index.

Most directly, the index measures the demand for shipping capacity vs. the supply of dry bulk carriers.

The names in the Baltic Dry Index 101 portfolio are highly correlated with how the Baltic Dry Index is trading. If the Baltic Dry Index is near its highs, it is natural to assume that the companies in the Baltic Dry Index 101 portfolio are charging very high carter rates and, thus, that their margins are zooming and they could be buy candidates.

Conversely, if the Baltic Dry Index has dropped off substantially, the names in the Baltic Dry Index 101 portfolio are most likely hurting and are possibly short candidates.

Here are a few ideas you might want to look at:

Eagle Bulk Shipping (EGLE): Eagle is one of the major bulk shippers of iron ore (1,121,200 million tons), coal (983,119 million tons), various gains (901,790 million tons), other ores (865,714 million tons), cement (542,118 million tons), coke (529,858 million tons) and steel (617,589 million tons). It has an extremely young fleet of ships (average age of 5), meaning that Eagle won’t be affected by increases in commodity prices for some time.

Dry Ships (DRYS): Dry Ships is the leading shipper of iron ore, coal and grain. DryShips currently owns a fleet of 46 dry bulk carriers, with an aggregate carrying capacity of approximately 4.2 million deadweight tons, which consists of five capesize, 31 panamax, two supramax and eight new-building dry bulk vessels. Since the company’s inception, Dry Ships has had 113% return on equity, with profit margins of 80%.

The company also has a very hot sub-company, mainly focused in the ultra-deep drilling market. Dry Ships is looking to ship this stub, which it is looking to spin off in the coming months.

For more dry bulk shipping stocks, including Excel Maritime Carriers (EXM), Genco Shipping & Trading (GNK) and Frontline (FRO), check out the Baltic Dry Index 101 portfolio at Stockpickr.com.


A note from James Altucher:

Every weekend I send an email to Jim Cramer and several hedge fund managers about the most interesting portfolios posted on Stockpickr that week. Usually those portfolios not only list stocks according to a theme but also offer significant analysis as to why the stocks are cheap.

Here are some examples:

Stocks related to drilling the Marcellus Shale

MLPS with yields above 7%

Microcaps trading for less than tangible book

Stocks that do well after Hurricanes

Here's the challenge: Build a portfolio at Stockpickr.com with great analysis, and send me the link. Each great portfolio (with analysis) will get posted on TheStreet.com with your byline (as a "Stockpickr Guest Columnist") and will be included in my email I send to Jim and the other
hedge fund managers on my list.


Posted on Aug. 11, 2008