How To Play The Decline In Commodities And Emerging Market Currency Prices
Cole Wilcox, the portfolio manager and CEO of Longboard Asset Management, has an interesting way to play the decline in commodities and emerging market currency prices.
His strategy: invest in the dry bulk sector.
"What's happening all over the world is a huge glutton of commodities [are] coming into the market from emerging market countries that…are kind of over-producing commodities in a weak economy, trying to put stuff out there in the marketplace," Wilcox told Benzinga.
Wilcox said there has been a lot of demand from emerging markets to export a "tremendous amount of raw material commodities around the world."
"For consumers of commodities in China, the relative cost of importing commodities from other places has gone down relative to domestic producers," he added.
Dry bulk shipping companies are an essential part of that effort, as they are needed to transport the commodities from an emerging market (such as Latin America) to another region.
"As emerging market currencies continue to go down, and the need and demand for continuing to export large amounts of increased production and [the need to] move those commodities, you have the need for dry bulk shipping cargo containers to move stuff around," Wilcox explained.
Even so, some investors may be unwilling to budge. After all, dry bulk companies took a beating over the last few years; who's to say they'll perform any better in the future?
Wilcox has faith in the sector, but he is most interested in DryShips (NASDAQ: DRYS). While the stock has fallen well below its all-time high (DryShips traded above $120 a share in October 2007), the company is trying to crawl its way back to the top. Year-to-date, DryShips is up more than 127 percent.
"The stock and the sector, it got destroyed over the last five years," said Wilcox. "There was a huge amount of consolidation. [Companies] went out of business. And now you're getting into this supply/demand, this equilibrium, where you can see a huge move in the stock to the upside -- re-pricing for the upside."
Wilcox is also intrigued by the fact that George Soros recently invested in the sector, including DryShips.
"If you look at the people who are in the trade right now -- George Soros took a significant position across the whole [smattering] of the dry bulk shipping cargo companies in the last quarter," said Wilcox. "So some of the best macro minds are…long this position and it's a great opportunity to have a rise to the upside."
Wilcox said that he likes DryShips because it is "probably the best brand in the investment world."
"It had a huge move back in 2007 -- kind of in the bull market commodity," he added, noting that traders are very aware of the stock.
Disclosure: At the time of this writing, Louis Bedigian had no position in the equities mentioned in this report.
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