Has DryShips Become the Perfect Stock?

Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?

One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock and then decide whether DryShips (NASDAQ: DRYS  ) fits the bill.

The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:

  • 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 mean nothing if a company can't produce profits from them. Strong margins ensure that company can turn revenue into profit.
  • Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
  • Moneymaking opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
  • Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.
  • Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. 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%

24%

Pass

 

1-year revenue growth > 12%

30.1%

Pass

Margins

Gross margin > 35%

52.4%

Pass

 

Net margin > 15%

(9.9%)

Fail

Balance sheet

Debt to equity < 50%

115.2%

Fail

 

Current ratio > 1.3

1.27

Fail

Opportunities

Return on equity > 15%

(3.3%)

Fail

Valuation

Normalized P/E < 20

NM

NM

Dividends

Current yield > 2%

0%

Fail

 

5-year dividend growth > 10%

0%

Fail

       
 

Total score

 

3 out of 9

Source: S&P Capital IQ. NM = not meaningful because of negative earnings. Total score = number of passes.

Since we looked at DryShips last year, the company has given back the point it gained from 2011 to 2012, as it went from a modest profit to a loss this year. The stock has lost a further 40% over the past year, adding to the multiyear woes that have struck the entire industry.

Shipping companies have had to deal with plunging prices for dry-bulk vessels, as the Baltic Dry Index has fallen more than 90% from its 2008 highs, with a glut in capacity resulting from ambitious shipbuilding projects that ran into the global recession and financial crisis. Now, conditions are so bad that DryShips actually paid more than $21 million to get rid of two Suezmax tankers that were under construction.

Still, 2013 has led to a small rebound. As Fool contributor Alex Dumortier noted earlier this year, the cyclical nature of the business points to some compelling values in the space. Diana Shipping (NYSE: DSX  ) , for instance, trades at less than five times its cyclically adjusted earnings, while DryShips' share price is below annual earnings adjusted over the cycle. Stocks throughout the space have finally started responding to that value proposition, as Navios Maritime (NYSE: NM  ) and Safe Bulkers (NYSE: SB  ) have joined DryShips and Diana with substantial gains in the New Year.

But in an obvious sign of how bad things are for DryShips, the company increased its offering of ultra-deepwater driller subsidiary Ocean Rig (NASDAQ: ORIG  ) shares by 50%, hoping to raise $126 million to help keep its struggling shipping business afloat. Yet DryShips has a market cap that's less than what its roughly 60% position in Ocean Rig is worth, assigning a negative value to DryShips' core business.

For DryShips to improve, it needs a long-awaited global economic turnaround to boost the Baltic Dry Index and get its profits back up. Ocean Rig may help DryShips survive the tough times, but the life support it offers won't last forever.

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.

Recently, The Motley Fool's chief investment officer selected his No. 1 stock for the year. Find out all about it in our free report: "The Motley Fool's Top Stock for 2013." Just click here to access the report and find out the name of this under-the-radar company.

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


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

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 February 18, 2013, at 2:00 PM, otherAquanaut wrote:

    Another thing to look for in the perfect stock is good management. DryShips really Fails on that metric as well.

  • Report this Comment On February 20, 2013, at 11:02 AM, imacg5 wrote:

    This is one of the most absurd titles that Motley Fool uses, and rehashes.

    You just insert a different company name into the same article.

    Are you that desperate to get click views?

  • Report this Comment On March 03, 2013, at 12:09 PM, TMFGalagan wrote:

    @imacg5 - Each article in this series uses a similar framework but includes specific research on the target company. I find most readers appreciate the personalized effort.

    best,

    dan (TMF Galagan)

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2260450, ~/Articles/ArticleHandler.aspx, 11/21/2014 3:52:04 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement