DryShips: Ready To Sail Higher This Summer

| About: DryShips Inc. (DRYS)

Since early April, investors have been scared straight as Greece and Spain have hit front page headlines on a daily basis. Things are likely going to quiet down for the rest of the summer because the EU summit surprised investors this week. The EU summit saw nations agree to a single supervisory mechanism for the eurozone banking system involving the ECB, marking a first step towards a banking union. This likely takes the pressure off the European crisis for the rest of the summer. Also, trading will slow and there will be fewer news headlines as the Olympics and summer vacations kick into gear. One important rule is, "never short a dull market."

Short sellers are wrong about the timing of the European crisis affecting world markets. It won't happen this summer. One sector likely to benefit is the shipping sector. Investors have priced in a major recession in Europe, possible hard landing in China, continued worsening in shipping rates, and oil prices remaining high. DryShips (NASDAQ:DRYS) looks ready to rally more than 30% this summer towards $3.00.

The drybulk sector has been hammered since 2008, as too many ships were brought online at the same time and demand declined. Shipping rates cratered more than 90% in the last 4 years. DRYS and its competitors trade at severe discounts to book value as the ships are likely worth less than what they are valued at on the balance sheet. However, DRYS looks like a bargain at $2.19/share, 75% below its book value. Investors are pricing in a likely default on debt in the next year or so, which is unlikely to happen.

Here are some interesting reasons to own DRYS:

  • DRYS has $928M market cap, their 65.2% stake in Ocean Rig (NASDAQ:ORIG) is worth $1.16B. The market place is valuing DRYS's drybulk and tanker business as if it were in bankruptcy.
  • Looking at the 6-K of DRYS and ORIG, the true debt payments over the next 2 years for DRYS is manageable at $242M during next 12 months, and $117M the following year. (DRYS owns majority of ORIG, so balance sheets are consolidated in DRYS 10-K)
  • Possible buyout by a large shipping company like Cosco. (Rumors in early Feb 2012 took stock up 70% in 2 weeks)
  • Management has talked in the past about a possible spinoff or IPO of their tanker business, which could unlock value.
  • Baltic Dry Index hasn't been down since June 7th, rising from 872 to 1004.
  • Oil prices have dropped significantly since May, helping lower fuel costs for their ships.

DRYS looks compelling for a summer-time rally as investors will likely come out of hiding if European headlines die down. Investors have priced in a default in the near-term for DRYS which is unlikely. When investors or short sellers get ahead of themselves with their thesis, the natural course is for reversion to the mean. In this case, DRYS has a solid chance at $3.00 this summer.

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Disclosure: I am long DRYS.

DISCLAIMER: This article is intended for informational and entertainment use only and should not be construed as professional investment advice, but rather my opinions as a writer only. Always do you own complete due diligence before buying and selling any stock.