Is DryShips the Perfect Stock?

Everyone would love to find the perfect stock. But will you ever really find a stock that gives you everything you could possibly want?

One thing's for sure: If you don't look, you'll never find truly great investments. So let's first take a look at what you'd want to see from a perfect stock, and then decide if DryShips (Nasdaq: DRYS  ) fits the bill.

The quest for perfection
When you're looking for great stocks, you have to do your due diligence. It's not enough to rely on a single measure, because a stock that looks great based on one factor may turn out to be horrible in other ways. The best stocks, however, excel in many different areas, which all come together to make up a very attractive picture.

Some of the most basic yet important things to look for in a stock are:

  • Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
  • Margins. Higher sales don't mean anything if a company can't turn them into profits. Strong margins ensure a company is able to turn revenue into profit.
  • Balance sheet. Debt-laden companies have banks and bondholders competing with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
  • Money-making opportunities. Companies need to be able to turn their resources into profitable business opportunities. Return on equity helps measure how well a company is finding those opportunities.
  • Valuation. You can't afford to pay too much for even the best companies. Earnings multiples are simple, but using normalized figures gives you a sense of how valuation fits into a longer-term context.
  • Dividends. Investors are demanding tangible proof of profits, and there's nothing more tangible than getting a check every three months. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.

With those factors in mind, let's take a closer look at DryShips.

Factor

What We Want to See

Actual

Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 31.9% Pass
  1-Year Revenue Growth > 12% (0.1%) Fail
Margins Gross Margin > 35% 74.8% Pass
  Net Margin > 15% 8.1% Fail
Balance Sheet Debt to Equity < 50% 97.3% Fail
  Current Ratio > 1.3 0.55 Fail
Opportunities Return on Equity > 15% 2.4% Fail
Valuation Normalized P/E < 20 18.21 Pass
Dividends Current Yield > 2% 0% Fail
  5-Year Dividend Growth > 10% 0% Fail
       
  Total Score   3 out of 10

Source: Capital IQ, a division of Standard and Poor's. Total score = number of passes.

With a score of just 3, DryShips isn't sailing toward perfection. But the once-specialist in dry-bulk shipping has broadened its business lately, giving itself new opportunities.

The dry-bulk industry is very cyclical, and shippers have been stuck in the doldrums since the financial crisis more than two years ago. Diana Shipping (NYSE: DSX  ) and Genco Shipping (NYSE: GNK  ) have both seen big share losses since 2007, and despite some signs that the worst may be over for dry-bulk specialists, the stocks remain on the defensive.

To diversify its exposure beyond dry bulk, DryShips has gotten into the ultradeepwater-drilling ship business. Those rigs have vaulted Seadrill (NYSE: SDRL  ) into the limelight and also helped established players Ensco (NYSE: ESV  ) and Pride International (NYSE: PDE  ) . But as we all know from the BP disaster, deepwater drilling has its own unique challenges, and a new entrant like DryShips faces even more challenges in building a presence in the industry.

Unfortunately, ever-rising share counts and the accompanying shareholder dilution haven't done investors any favors. But if the company's core dry-bulk business picks up and it can succeed in its deepwater ventures, then DryShips may find itself a lot closer to perfect in the years to come. 

Keep searching
No stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate out the best investments from the rest.

Click here to add DryShips to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. The Fool owns shares of Ensco. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.


Read/Post Comments (3) | Recommend This Article (11)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 26, 2011, at 6:24 PM, multi007 wrote:

    Good article. I like the ones that present facts and lets us decide.

  • Report this Comment On January 28, 2011, at 4:07 PM, noahfarb wrote:

    Positioning for a major spin-off of oil rig business. Haven't researched it yet, but could be a potential catalyst.

  • Report this Comment On February 05, 2011, at 7:42 PM, franphelps wrote:

    trend line looked like low of 4.50 did not get there stoped at 4.85 high line 6.50 you could play the line i dont , i hold drys

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