I first became aware of Diana Shipping (DSX) in 2005 when they were brought public. For the first year and a half, the action was quite dull as low rates for shipping disappointed investors for the bulk (no pun intended) of 2006. While I would normally have written off such a company and waited for some time to return, I was constantly reminded of their existence as brokers continued to call me from time to time when Diana was raising capital in the form of share offerings to buy new vessels. In the Summer of 2006, the stock finally began to turn as the market anticipated better rates for dry bulk shipping and since then the stock has been in a very attractive up trend.

Last week the company issued additional shares to shore up their balance sheet after entering agreements for an additional vessel in November of 2007. There are an additional two vessels scheduled for delivery in 2010. The shares were offered overnight on September 20, and priced at a slight discount to the closing price. Sept 21, the stock opened higher and has not looked back. I received a small amount of stock on the deal and then bought a decent position early in the day on the 21st. From a technical perspective, one should note that if a company issues additional shares representing 15% of available float and the stock trades up sharply from that level, demand in the market is strong and the risk associated with a long position is somewhat muted.

Fundamentally, it is easy to see why investors are getting excited about the company. Currently 7 of the company’s 16 vessels will roll out of long-term contracts at the end of April 2008. According to a Jefferies analyst, the current average rate being paid on these ships is $40,000 per day. At the same time, the spot rates for ships such as these are nearing $70,000 per day. While there is no guarantee that current spot rates will be available for contract next year, the environment is obviously healthy for companies who own the means to transport dry goods such as coal, ore, and grains. The incremental increase in day rates would impact earnings and subsequently the dividend rate paid to investors. Diana’s dividend policy is to pay roughly 100% of free cash flow in the form of quarterly dividends which helps to return capital to shareholders and somewhat stabilize the stock price.

While high day rates have driven the stock higher, investors should be cautious investing in transportation stocks. Day rates are driven by the demand for goods which is directly affected by global GDP measures. If the world economy begins to soften, demand could decrease rapidly, leading to an oversupply of shippers and possible idle time for vessels. Such an environment is not out of the question although currently the market is pricing in continued growth. It is still important to understand the drivers of value and how they may shift in the months and years ahead.

The current outlook appears bright for Diana and technical measures support short-term increases in the stock. The company has a healthy balance sheet that will allow them to take advantage of opportunities for additional acquisitions, and should support an attractive dividend program. Earnings continue to grow and analysts expect this trend to continue even while the company distributes earned capital to shareholders. For now, the stock appears to be worth taking a close look at.

FD: Author has long position in DSX