July 11 (Bloomberg) -- As U.S. stocks sank in May and June, shares of oil-tanker companies such as Teekay Shipping Corp. proved buoyant, outperforming the Standard & Poor's 500 Index by 17 percentage points.

The surge reverses 18 months of underperformance and may presage further gains to come, as share prices play catch-up to profit growth, with the added luster of dividends that outstrip even high-yielding utilities. The companies themselves also consider their stock cheap, if $1.31 billion in buybacks in the past year is any indication.

``As an investor, you want to buy when things are bleak, and these things have been pretty bleak,'' said J.C. Waller, who manages the $650-million Icon Energy Fund in Greenwood Village, Colorado. ``When you find that combination of value, dividend yield and price appreciation coming from where these things have been, you can't ignore it.''

The Bloomberg Tanker Index jumped 14 percent between the end of April and June 30, as daily rates for the largest carriers touched a four-month high in what is usually a period of price declines. The S&P 500 slipped 3.1 percent in that period.

Overseas Shipholding Group Inc. of New York, the biggest U.S.-based oil tanker owner, led the advance with a 21 percent gain. Teekay, based in Nassau, Bahamas, climbed 8.8 percent.

`So Low'

The tanker stock index touched its low for the year in mid- April, 32 percent below its record high of November 2004. Even after rebounding, its price stands at 8.2 times earnings over the past 12 months, compared with 13.4 when the index peaked. The S&P 500 trades at 17 times earnings.

Waller, whose fund has outperformed 78 percent of similar funds over the past five years, estimates that an S&P index of tanker and pipeline stocks is 22 percent undervalued. He started buying shares of Frontline Ltd. and General Maritime Corp. in May.

``They've gotten so low that there's not a whole lot of downside,'' said Malcolm Polley, who helps manage $1.3 billion at S&T Wealth Management Group in Indiana, Pennsylvania. He started buying Hamilton, Bermuda-based Frontline and New York-based General Maritime in February.

Business is improving too. Freight rates for the class of ships known as very large crude carriers, which carry 2 million barrels of oil, on routes from the Arabian Gulf to the U.S. and to Japan have climbed 32 percent and 81 percent, respectively, since the end of April.

Profit Reports

Earnings have held up better than analysts' predicted earlier in the year. First-quarter profit at all six members of the tanker index exceeded analysts' estimates.

Omar Nokta, an analyst at New York-based Dahlman Rose & Co., raised his earnings predictions for some tanker stocks twice in June. Constraints in the supply of tankers, and the need to lock in oil contracts further in advance, will support earnings growth and cash flow and justify higher share prices, he said. Dahlman Rose is an investment bank that specializes in shipping and energy companies.

Nokta boosted his 2006 profit projection for Teekay, the world's largest oil tanker owner, to $4.79 a share from $3.98. He expects Overseas Shipholding to earn $10.24 a share, up from $8.31.

``If you buy now, you get this awesome run for the fourth quarter,'' said Nokta. ``Most of the Street hasn't changed their estimates yet, not even for the current environment.''

Investors are protected from the risk of falling rates by companies' share buybacks, which will tend to support prices, according to Nokta. The members of the tanker index have announced $1.31 billion in buybacks in the past year, which amounts to about 11 percent of the gauge's total market capitalization of $12 billion.

Dividend Plays

The stocks also provide income, Polley noted. Companies in the index on average pay annual dividends equal to 6.3 percent of their share prices, compared with 3.5 percent for both electric utilities and telephone companies in the S&P 500, the highest yielding groups in the benchmark.

Some analysts say the higher rates, and the rally, won't last. They warn that the stocks' low valuations reflect the risk of investing in an industry where rates and earnings fluctuate rapidly.

Jonathan Chappell at JPMorgan Chase & Co. in New York attributed the June rate surge to short-term factors including the use of some tankers as storage by Iran and Saudi Arabia.

``Everything else, from inventories, to demand estimates, to the number of ships that have been removed this year, points to a bearish market,'' said Chappell.

Glut on the Horizon

The share prices also reflect concern that there are too many new tankers being built as estimates for oil demand growth decline. The International Energy Agency said in a June 13 report that oil demand will increase 1.5 percent this year, compared with a peak of 3.8 percent in 2004. Tanker demand will increase 3.8 percent in 2006 through 2008, compared with fleet growth of 5.4 percent, according to a June estimate by shipping analysts at Jefferies & Co. in Houston.

Such worries aren't discouraging Mark Freeman, of Dallas- based Westwood Management Corp., who said the stocks are inexpensive enough relative to earnings that they're still a bargain if rates decline.

``Even if you get a 40 percent correction in shipping rates in general, many of the companies would still be attractive,'' said Freeman, who helps manage $5 billion at Westwood, including shares of Overseas Shipholding. ``The value's being created by skepticism in the market.''

To contact the reporter on this story: Dune Lawrence in New York at dlawrence6@bloomberg.net.

Last Updated: July 11, 2006 00:07 EDT