Why DryShips, Inc. Stock's Crash Today Should Leave You Cold

Beware: DryShips could be headed for rough waters as the Baltic Dry Index tanks.

Jan 10, 2014 at 3:20PM

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of dry bulk shipping company, DryShips (NASDAQ:DRYS) sank nearly 7% this morning after the Baltic Dry Index dropped a nerve-wracking 11% to 1,706 overnight. The index is a key indicator of shipping activity, measured by the cost to transport goods through various fleet classes.

So what: After a sharp rebound in 2013, which also sent shares of dry bulk shippers soaring, the Baltic Dry Index is losing steam at a pace faster than you could imagine. After Friday's double-digit fall, the index has already shed 19% since the beginning of the year on weak sentiments backed by several factors.

One, it's a seasonally weak period for iron ore demand from China, which in turn means lower demand for vessels to ship the commodities. In fact, shares of leading iron ore mining companies too are feeling the pressure as worries about China's slowdown continue to loom large. Two, unpredictable weather in key markets, such as Australia, is also playing spoilsport.

Now what: Stifel's Ben Nolan sees further downside in the spot shipping rates as iron ore inventories in China continue to remain high. That's terrible news for DryShips, especially since the index's drop is being led by the largest and otherwise high-margin capesize ships. Spot capesize shipping rates crashed a staggering 27.5% on Friday alone, taking its total year-to-date drop to 33%. Since several of DryShips' capesize contracts are near expiry and will have to be renewed at spot rates, any further drop in rates could put the company in trouble.

DryShips is struggling with huge debt and losses, so any potential hurdle to its top-line growth is nothing but dangerous. The market applauded when the company suspended an equity offering in early December last year, but the excitement fizzled out even before the new year as DryShips resumed the offering.

Why does the situation appear bleaker today? Here's a simple equation: Contracts at low rates will mean lower revenue and greater losses, leaving DryShips high and dry with negligible free cash flow. With debt and interest payments mounting, the shipper will then have no option but to issue more shares to raise capital, and that's a double whammy for existing investors -- zero earnings growth and constant dilution of wealth.

Now that's a scary picture, and now you know why today's slump in the Baltic Dry Index should leave you scurrying for cover if you're a DryShips investor.

If DryShips is burning your capital, this stock will make you rich
There's a huge difference between a good stock and a stock that can make you rich. The Motley Fool's chief investment officer has selected his No. 1 stock for 2014, and it's one of those stocks that could make you rich. You can find out which stock it is in the special free report: "The Motley Fool's Top Stock for 2014." Just click here to access the report and find out the name of this under-the-radar company.

 

Fool contributor Neha Chamaria has no position in any stocks mentioned, and neither does The Motley Fool. 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 Motley Fool has a disclosure policy.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.

 


Compare Brokers