Dry Bulk Shipping Rebounds... Sort Of, Almost (EGLE, DRYS, FREE)

September is on pace to be a banner month for shipping stocks FreeSeas Inc. (NASDAQ:FREE), DryShips Inc. (NASDAQ:DRYS), and Eagle Bulk Shipping Inc. (NASDAQ:EGLE). They're up 290%, 62%, and 115%, respectively, month-to-date, overcoming an amazingly long dry spell. The question is, why have EGLE, FREE, and DRYS been so strong all of a sudden, and more than that, are these rallies built to last?

The answer to the first question is, because the Baltic Dry Index (of average maritime shipping rates) is on the rise in a major way. The answer to the second question: Yes, and no.

The Baltic Dry Index is the aggregation of daily charter rates being offered by the world's Capesize, Panamax, Supramax, and Handysize goods-carrying oceanic vessels. Oil tankers as well as container ships are specifically excluded from the aggregation, though it's not a stretch to say the charter prices for bulk cargo boats moves in tandem with costs to charter other types of maritime shipping vessels.

More important to investors, the Baltic Dry Index has skyrocketed its way out of a long-term lull to prices that, well, may not mean wild profits for companies like DryShips, FreeSeas, and Eagle Bulk Shipping, but prices that are at least strong enough to keep them in business rather than mothballing entire fleets of these boats. And for investors, that glimmer of hope now and the possibility of a complete turnaround in the near future is compelling enough to turn the heat up on DRYS, EGLE, ad FREE.

Specifically, the Baltic Dry Index (or BDI) is currently at 2127. That's up 88% from August's ending level, and up 200% from the lows we saw over the course of 2012 (which were multi-year lows, by the way). In fact, 2127 is the highest BDI reading we've seen since late 2011. But, the sheer size, speed, and strength of the current surge may well indicate that this long, agonizing drought is over. Ergo, the long, agonizing drought for DryShips, FreeSeas, and Eagle Bulk Shipping is also over.

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That's not to say these stocks are an immediate but, however.

As firm and strong as the Baltic Dry Index's rise has been, there's nobody who would argue it hasn't been overdone. It's due for some sort of correction, even if just a mild one, in the foreseeable future. For the same reason it's overbought, so too are the industry's most popular stocks. In other words, investors interested in buying these names may want to be patient and let them cool off a bit first.

All of that being said, it should be noted that even this meteoric rise in the BDI's value won't inherently mean these shippers start turning a profit again. It will get them closer to positive earnings, but may not get them all the way there. As such, these are still speculative investments.

There is no "magic number" per se, since each company's operating costs differ. Just for the record though, 2008 was the last "good" year for Eagle Bulk Shipping Inc. (before revenue started to rise while profits started to fall). The Baltic Dry Index was around 900 for the better part of that year. EGLE remained profitable - though just barely - through 2010, when the BDI level averaged something around 2500. Ditto for DryShips Inc. - it can stay alive with a BDI around 2500, but needs something well above that level for comfortable margins. The same goes for FreeSeas Inc. Point being, once the BDI gets above the 2500 level to stay, then these speculative trades become actual investments again.

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