Most of us go about our daily routines without ever stopping to consider how the products that we depend on every day make it to our cities and homes.

From the food that lines our pantry to the cement that builds our roads to the gas that runs our cars, all goods have to get from point 'A' to point 'B' -- whether by land, air, or sea. Of those, we believe the companies that take the sea route currently present some of the most compelling value opportunities for today's investors.

Most shippers are categorized according to what type of goods they transport. One of the first groups that springs to mind is the Supertankers, which typically carry in excess of 250,000 tons of crude oil. While companies that operate these vessels have rallied nicely along with the recent spike in oil prices, some still trade at extremely low valuation levels. For example, Bermuda-based Frontline (FRO) currently sports a trailing P/E of just 5.0.

However, based on current valuation levels, as well as favorable macroeconomic factors, the most attractive stocks in the shipping space currently belong to companies that carry cargo such as grain, iron ore, coal, forest products, and cement -- the so-called "dry bulk" shippers. These types of ships currently handle around 2.5 billion tons of cargo -- or more than one-third of the world's ocean-based trade.

Until recently, dry bulk shipping has long been considered a quiet, mature business -- well off most investors' radar screens. In fact, during the 1990's, total industry shipping volumes increased at just +2% per year.

However, that began to change around the late 1990's and early 2000's, as booming economic expansion in China and other emerging markets caused demand for shipping space to skyrocket. From 1999 to 2004, the annual amount of dry bulk goods shipped -- which is measured in tonnage -- increased by a full +25%. And with limited fleet capacity available, the Baltic Dry Index (a proxy for shipping rates) surged.

Not surprisingly, stocks in the shipping industry followed suit -- with some racking up tremendous gains of +400%, +500%, or more. However, this cyclical business has hit a slowdown recently, and shares of most firms have fallen sharply from their peaks. As a result, this corner of the market is now chock full of value. In addition, the shipping firms we'll introduce you to below are now offering dividend yields of 7%, 13%, and in some cases even 14% or more!

And while the shipping industry has generally enjoyed a strong run over the past several years, there are several factors that lead us to believe the party can continue:

Supply:

• A significant percentage of the world's shipping fleet was built in the 1980's. Most of these ships are now reaching an age where they will need to be taken out of service and replaced.
• Shipbuilders make more money constructing oil tankers and containerships, so there is less capacity available to build dry bulk vessels.

Demand:

• The Chinese economy is growing at a torrid pace, and the country is busily importing incredible amounts of raw materials for highways, bridges, and other infrastructure projects.
• Last year, China imported around 270 million dead-weight tons (dwt) of iron-ore -- almost quadruple the 70 million it needed just five years ago. That total is expected to rise to 305 million dwt in 2006, enough to make nearly 400 million tons of steel. According to one analyst, if the iron-ore used in China each year was stacked in the shape of a football field, then it would reach a height of approximately 19 miles.
• The recent surge in oil and natural gas prices has helped lift the price (and thus the shipping costs) of coal -- which accounts for more than one-fourth of the average dry bulk shippers' freight.

With all of the above factors in mind, the dry bulk shipping industry is a great place to look for undervalued stocks with solid long-term fundamentals. Here's a quick look at some of the leading players in this industry, all of which are trading at a sizable discount to their fair value . . .

Important Note:  Throughout the remainder of this article, editors Nathan Slaughter and Paul Tracy provide a closer look at five high-yield shipping stocks that could be poised to rebound off their recent lows. However, in order to view the remainder of this article, you'll need to subscribe to our value investing newsletter -- Half-Priced Stocks. After you subscribe you'll receive immediate access to this full article, as well as our monthly Half-Priced Stocks newsletter and a host of additional premium content. Please visit one of the following links to continue . . .

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