DryShips Inc.: A 400% Stock I Missed

DryShips (DRYS) is one of the leading companies in dry shipping (in terms of price appreciation potential). According to Dhinesh Ganapathiappan:

The $2.3 billion company operates a fleet of 35 dry bulk shipping vessels. Shares are currently trading at just 9 times current earnings, and very cheap 4.4 times future earnings. The company has exceeded the analyst estimates for the past four quarters, and future estimates may be just as conservative. If you had owned DryShips (DRYS) at the end of 2007, you would have 400% more than what you started with at the beginning of 2007.

Rob Wallaston replies: Study the long term chart and if you have a chart of the BDI in front of you, see how it correlates to the index. Ask yourself what the important levels are on the chart and learn how to trade them. Just as a warning, I missed this 400% stock in 2007 and now I am looking to buy it. However, I am worried about the $71.80 level. I want the stock to close there and then move to 85. At that point I will be a buyer. Anyways, long way to go, and it seems like the financials will spoil our party once again by taking everything down. Stay tuned this week as I plan to bring in some of DRYS' competitors for analysis. Happy trading.

Risks: Analysts are cautious because of a surge of new ship deliveries, which could increase by 78% year over year in 2009 and another 53% in 2010. Shippers may no longer be price setters and enlist pricing power going forward. The question is: if the outlook for this business is so great, why is the BDI (dry-shipping index) tanking?

Comments

[John F:]

The comments of analysts are always interesting. The problem is that they could be just as incorrect as the novice who reads their opinions. Ivanoff concludes his comment with the most significant statement in the article. "If the outlook for this business is so great, why is the BDI (dry-shipping index) tanking?"

2008 Jan 10 04:23 PM

[david123:]

The reason why the BDI is tanking is because, like retail companies and the price of natural gas, the performance of the Baltic Dry Index is seasonal. Every year at the end of the year, the BDI goes down because of the initiation of contract negotiations regarding iron ore pricing with China, and then, right around Feb. the price starts to increase again. Because the interest in drybulk is relatively nascent, relatively uninformed investors are taking the drop in the BDI to be a secular as oppposed to seasonal phenomen, thus creating the buying opportunity. This happened with natural gas a couple of years ago when energy prices where increasing. the next year though, the market was much more savvy and did not sell after the winter months nor buy as heavily in the winter months. This is part of the problem that caused the downfall of that energy trading hedge fund. It only takes one year for a investors to get wise to new paradigms, as short or long lived as they may be.

2008 Jan 10 08:30 PM

[User 97679:]

The fleet is actually 46 vessels.

2008 Jan 11 09:00 PM

[howard1:]

Besides what david expressed so well about the seasonally, so well....another reason is the concern about slowing growth from china, which is a major iron ore country, even through china may be slowing, its projected GDp is still ganbusting and can support the BDI once the worries subside...of coruse you have to ask, if their are worries what about the actural shipping rates in the last q of 07 being down, well things certainly have cooled,but if you belive that they will pick up again in 08 and and contracts get done for a good price then by all means this is the right bet, plus drys did buy its first oil drilling ship and that is growth they are going for outside their core market, and it shook some thinking...

2008 Jan 12 05:36 PM

[gridflash:]

One of the things that isn't being discussed here is the capacity constraints of the Australian ore terminals feeding China's ore demands.

Dry-bulk carriers move loads of iron ore, coal and steel. China, the biggest iron ore importer, buys its iron ore mainly from Australia and Brazil.

The wait times at terminals like Newcastle in Australia this summer were reported to be as long as 32 days. In July they had over 60 ships waiting to load and unload at Newcastle. Dalrymple Bay was almost as bad.

The result has choked off world's supply of cheap commodities because of capacity constraints, causing the futures exchanges to bid limit up. This could make demand appear much higher than it actually is.

Current wait times however seem to be down to about 3 weeks. As wait times fall a lot of ships will free up and freight rates will continue to fall. If commodity prices have been propped up by capacity constraints they could well see a steep drop in the near future.

2008 Jan 12 08:19 PM

[howard1:]

gridflash - A very good obsevation, how and where did you find this out?

2008 Jan 13 12:21 AM

[gridflash:]

You can bring up a lot of links just by googling "Port Congestion" for China or Australia.

Notes from DSX conference call...

Port congestion: Australian coal - 40 ships waiting at Newcastle, down from 70 earlier in the year. Congestion should moderate but not evaporate. Congestion only helps to point of diminishing returns.

China demand for iron ore and coal fuels freight rates, says CISA

"Scarcity of available vessels is mainly driving dry bulk rates upwards. There is heavy congestion in Australian ports where the average wait time for loading a vessel is estimated at 32 days. An analyst said that "That causes capacity to be taken out of the market." He added that as of late last week there were 66 ships waiting to be loaded at Newcastle port in mid July and there is also congestion in other Australian ports."
www.steelguru.com/sele...

According to reports, the vessels waiting for berths at Newcastle had recently risen to 70, since congestion hit the port towards 2006-end, with maintenance work on rail tracks aggravating the situation. Currently, the minimum waiting time for a vessel to get berth is reported to be 20 days at the Australian port.
www.thehindubusinessli...

Atlantic iron ore freight rates plummet on easing port congestion
www.platts.com/Metals/...

2008 Jan 13 01:03 AM