Dryships (NASDAQ:DRYS) is the spitting image of Baltic Dry Index volatility (BDI). This firm without question thrives on shipping rate volatility where the idea of “go big or go home” isn’t a corporate mindset but the actual business model they execute every day. Before the last bear market, this worked great, but when things got rocky, this firm’s stock price turned into the Titanic and sunk like a rock. The firm’s stock price tells the story well, as it hit an all time high of $131.40/share around the peak of the bull market and then subsequently dropped all the way down to $2.72/share at the bottom of the bear market.
In our opinion, DryShips has lost the one thing that used to make it unique among shipping names, in that it offered the closest thing to direct BDI exposure without actually having to own a real ship. Today investors have the option of looking at other names with direct BDI exposure such as Genco Shipping (NYSE:GNK), Excel Maritime (NYSE:EXM), and Baltic Trading (NYSE:BALT). Further, we feel that DryShips has turned into an industry leper among investors for a few reasons. These reasons include losing focus on its core competency and hanging out its shareholders to dry during the bear market. We are rating Dryships a PASS for these two reasons.
Reason 1: Dead Men Tell no Tales…Generally
The saying “dead men tell no tales” unfortunately doesn’t apply when it comes to how DryShips has dealt with shareholders throughout the last bear market. During the global recession the firm diluted shareholders not once, not twice, but three times. In particular, the biggest dilution occurred in the 3rd round of total dilutions when it diluted current shareholders by 40%. To be clear, this was on top of two prior dilutions that occurred earlier on but not very far apart from one another. We doubt that there is one current shareholder who still has complete confidence in management’s ability to handle the volatile industry environment, except for management itself. When we see such reckless and aggressive action that shareholders ultimately pay for, we feel it’s best to stay away from a firm like this.
We’re bullish on this industry space, but there is no justifiable reason at this point to sink one penny into the name. Regardless of how the industry does when management is this outlandish in all the wrong ways, it doesn’t justify the risk. Even when the industry starts to fully rebound, the firm could lag competitors, as investors will likely remain hesitant in putting capital into the name. Given the firm’s track record with shareholders, no one should be that surprised.
Reason 2: One Way or Another the Road Map is Gone
DryShips' management lost the business road map at the peak of the bull market when it decided to expand well beyond its bread and butter business. At the time, oil prices were well north of $100 a barrel, so it decided energy was the place to be. It specifically entered the deep sea drilling business through a few different acquisitions that ultimately involved taking on heavy debt. Looking back, it seems as if the firm was just chasing energy sector heat. In our opinion, they acted no differently than a late to the party retail day trader jumping in on something they new little about but with a lot more leverage involved. Should oil prices increase and hold, the firm may now start to truly capitalize on this wild venture. Still, that doesn’t change the fact that it was a poor decision at the time.
With shipping rates finally stabilizing and oil prices simultaneously rising, we wonder what management's intentions are now. No one really knows with much certainty what this firm is going to turn it self into. It could turn into a small deep sea-drilling firm, return to primarily being a dry-bulk shipper, or some wild hybrid that has yet to be truly unveiled. If management doesn’t even “truly” know what they want, the firm could be moving forward; that just spells danger in our mind. Whoever buys or owns this stock won’t know for sure what they signed up for, which is just another reason we are avoiding the firm.
For the investor interested in shipping, we like the name Genco Shipping (GNK) (Genco Shipping & Trading: Value Investments in a Rebounding Industry) and for the deep sea drilling space we like Transocean (NYSE:RIG). We rate DryShips a PASS for the reasons above and have zero interest in their “two for one special deal” because after all, tomorrow they could be offering some new “three for one special deal.”
Disclosure: I am long GNK.