Watch Those Forward PEs

In the comments on the previous article mentioning DryShips, commenter Mark leaves a very insightful comment on the global shipping industry. I thought I'd promote it to the top here, as it's more than I could offer.

This article fails to mention that dry bulk spot rates are extremely volatile and forecasting where they will go is subject to massive room for estimation error, even for industry veterans. Thus forward PE can be very deceptive and is a silly way to look at the companies. Last year Clarksons research surveyed a large collection of readers to forecast where rates would go in 2007 and EVERYONE was wrong by a large margin. (they spiked massively) They can also spike massively downward in the same fashion... If forward earnings ends up being 80% lower, which historically isn't a crazy notion at all if you look at a rate chart, your PE will be 5x what you thought it was. Thus using forward PE is pretty silly given its forecast error range is so wide as to be near meaningless.

Also, the capacity for shipbuilding yes is indeed "tight", but for bad reasons. It is fully booked to the max and the industry is about to see the largest supply growth ever, for multiple years, going forward. If demand falters in any way and this supply comes on, it will be a slaughter for these companies as they undercut each other gruesomely as they have in the past since ships must essentially be utilized at all times else they are losing money, and its a very fragmented market. Not saying that its all clear cut as to where things will go, but this Barron's article barely touches on the most important issue/risk of massive supply growth which is basically the entire swing factor. They should do their homework a little better.