Surprises are part of the game when it comes to picking stocks. Sometimes, this can mean bad news -- like management at one of your top stocks revealing options backdating.
Other times, though, the market gets caught off guard by positive surprises from stocks that most investors thought were down for the count. A chorus of "I told you so" from investors who stood by the stock often follows. Meanwhile, short-sellers are kicking themselves.
To dig up some of these unloved, naysayer-defying stocks, I'm turning once again to The Motley Fool's CAPS community. Each of the companies below had received a one-star rating (the lowest) from our community of investors just 30 days ago:
|
Stock |
30-day return |
One-year return |
Current CAPS Rating (out of five) |
|---|---|---|---|
|
Acadia Pharmaceuticals |
95.7% |
(11.3%) |
|
|
Parkervision |
36.5% |
57.5% |
|
|
Amarin Corp |
30.7% |
(26.1%) |
|
|
LaserCard |
29.3% |
(38.5%) |
|
|
Gottschalks |
28.2% |
50.5% |
|
|
DryShips |
27.0% |
125.6% |
|
|
Pre-Paid Legal |
25.7% |
36.9% |
It's important to remember that some of these stocks, particularly the smaller, more volatile ones, could just as easily reverse these big gains over the next 30 days. In some cases, though, the strength could be a sign that the company's propsects have changed for the better, or that it had been beaten down just a little too far.
Are these stocks better than CAPS players had thought, or are they just singing that proverbial swan song? The best way to get a feel for where these guys are headed is to dig in and do some research. I thought I'd kick you off with some thoughts on one of them: DryShips.
Will shareholders end up all wet?
DryShips is currently a big fat blemish in the portfolios of many top CAPS players. They include CAPS' top player, TMFEldrehad, who has been short the stock in CAPS as it has run up a screaming 144%. Given that TMFEldrehad didn't reach the top o' CAPS by picking a lot of losers, I figured there must be something interesting about DryShips. I wasn't disappointed.
In the top bear pitch on the DryShips CAPS page, player ctmedic00, with the help of an article from Kathryn Welling of Weeden & Co., body-slams the company. It turns out that DryShips' IPO was rife with well-disclosed (but nonetheless fishy) "related party transactions." Worse yet, CEO George Economou, along with then-CFO Christopher Thomas, defaulted on $175 million in high-yield notes with a former shipping company, Alpha Shipping, which went bankrupt in 1999. If that's not enough, Economou is reported to have said he was listing in the U.S. because U.S. investors are "the dumbest investors around."
You don't really have to dig too far into the IPO prospectus to start running into funny stuff. For instance, page three discloses that the company was planning to buy six ships from Economou's sister, and that it was declaring a $69 million dividend prior to the IPO -- a sum that would wipe out all the shareholders' equity and then some. If you trudge further into the document, you run into the bond default under the heading "Additional Matters" on page 67.
That's followed closely by a table of principal shareholders, which includes the Entrepreneurial Spirit Foundation (of which Economou is CEO), Advice Investments (owned by Economou's wife), Magic Management (owned by Economou's ex-wife), and Easychem Trading and Naptha International, which were given $23 million in stock in exchange for a ship.
After going public at $18 per share and hitting the market at more than $19, the stock spent the next year tanking. When May of 2006 hit, the stock had sunk below $9. Since then, fellow Fool Stephen Ellis took DryShips to task, was rebuffed by the company, and wrote a second article which the company also not-so-deftly sidestepped.
But wait ...
The glaring question, though, is how the stock managed to more than double between last May and now.
The most obvious reason is performance. For its September quarter, DryShips put up substantially flat revenue and much lower EBITDA than the prior year. Nonetheless, it managed to beat analysts' expectations. December results not only beat analysts' estimates, but were up versus the December 2005 results.
Besides recent performance, some highly ranked CAPS players have been positive on DryShips, thanks to its low multiple (less than 10 times estimated 2007 EPS), nice dividend, and the high level of insider ownership, which is typically a good sign. Multiple Wall Street analysts also currently call DryShips' stock a "buy."
In this Fool's opinion, if there's any question of impropriety in management's history, the onus is on them to make their allegiance with shareholders' interests blatantly obvious. Mr. Economou simply has not done so here. In the end, DryShips may never have some fantastic implosion that leaves shareholders high and, well, dry. But with thousands of listed stocks out there -- and more than 4,000 of them rated on CAPS -- DryShips is exactly the kind of "opportunity" I'm willing to take a pass on.
I'll leave you with a tasty tidbit pulled from DryShips' 2005 20-F filing:
"Our majority shareholder is controlled by Mr. George Economou who controls a company that owns 35.5% of us and a foundation that owns 70% of Cardiff [DryShips' management company]. Mr. Economou is also our Chairman and Chief Executive Officer, and a director of our company. These responsibilities and relationships could create conflicts of interest between us, on the one hand, and Cardiff, on the other hand. These conflicts may arise in connection with the chartering, purchase, sale and operations of the vessels in our fleet versus drybulk carriers managed by other companies affiliated with Cardiff and Mr. Economou. In particular, Cardiff may give preferential treatment to vessels that are beneficially owned by related parties because Mr. Economou and members of his family may receive greater economic benefits."
Think DryShips may still be a winner? Head over to CAPS and let the community know what you think. While you're there, you can start your research on any of the other six stocks listed above -- or any of the 4,000-plus stocks on CAPS.
More CAPS Foolishness:
Fool contributor Matt Koppenheffer didn't see these particular moves coming, but he's rarely surprised at Mr. Market's general tomfoolery. You can check out Matt's CAPS portfolio here, or visit his blog. He does not own shares of any of the companies mentioned. The Fool's disclosure policy approves of the notably high level of disclosure from DryShips.
