What happened

Shares of Athens, Greece-based Diana Shipping (NYSE: DSX) were swimming full speed ahead Tuesday morning, up by 13.4% as of 11:49 am EST after brokerage firm BTIG announced it was initiating coverage of the dry bulk shipping company with a buy rating and a $ 5 price target.

So what

Diana Shipping stock closed trading Monday at $ 2.60 a share, meaning BTIG is predicting close to at 100% gain for this stock over the next 12 months – reason enough for investors to get excited, one would think. But consider, too, BTIG’s logic in making this buy recommendation.

Diana just completed a stock tender in which it successfully bought back about 7% of its shares outstanding for a low $ 2.50 a share, reports StreetInsider.com. This will have the effect of concentrating future profits among fewer shares of stock.

Image source: Getty Images.

Now what

And BTIG seems pretty sure there will be profits to concentrate. While Diana has been burdened by a weak freight market and an aging fleet in recent years, BTIG anticipates the freight market will improve over the next couple of years as the global economy emerges from its recession. In such recoveries, says BTIG, companies operating older fleets tend to outperform because their asset costs are low but the rates they can charge for use of those assets increase – resulting in improved profit margins.

BTIG further predicts that Diana will use this market recovery to pay down debt and strengthen its balance sheet. Later in the cycle, when operators of newer fleets tend to outperform, the analyst expects to see Diana upgrade to newer ships.

The question investors need to ask themselves now is: Will Diana make enough profit early in the cycle, and pay down enough of its $ 430 million debt load, that when it begins buying ships later, it doesn’t just overload itself with debt all over again?

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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