Our favorite leading indicator of economic activity, the Baltic Dry Index, will likely be the first to signal the end of a recession. And it provides a convenient clue to one stock I believe will comeback faster than most others, once the market-wide comeback is underway.
The Baltic Dry measure shipping costs, and therefore shipping activity, and is therefore a great “boots on the ground” measure of what’s going on in the world economy. When costs are up, it benefits shipping companies. My favorite right now is Frontline (FRO).
Frontline focuses specifically on tanker ships for transporting oil. When economic activity picks up, so will oil prices and shipping rates. And that plays right into Frontline’s hands.
The oil focus means Frontline’s recent quarters haven’t been as bad as other shippers because of oil stored offshore to take advantage of the contango situation.
Overall, the company still posted growth for 2008, but last week’s quarterly numbers were certainly lackluster. Earnings per day on a “very large crude carrier” dropped to $61,500 from $96,500 a year earlier.
Still, Frontline management seems to be making the right moves in tough times. It’s proceeding with cautious investment in new capacity, switching some of its more profitable daily arrangements to more predictable long-term contracts.
Even so, the stock is getting hammered again today, down another 4% as of this writing.
But that puts the stock price at about two times trailing earnings. And with enough cash flow to cover interest costs, I’m sure Frontline can remain a going concern through the crisis.
When spending does pick up those who buy Frontline at, or near, the market bottom will likely be the first to benefit.
Senior Analyst, The White Cap Report