Why DryShips, Inc. Stock's 10% Jump Last Week Makes Absolutely No Sense

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  ) propelled 10% last week after the Baltic Dry Index, or BDI, inched up slightly after falling continuously for 11 days through Feb. 4. The index is a key indicator of shipping activity, measured by the cost to transport goods through various fleet classes.

So what: So how much did the BDI actually rise that sent DryShips shares into a tizzy? Only 0.65%, or 7 points, between Feb.4 and Feb.7. Yes, you read that right. At Friday's closing level of 1,091, the BDI is still at its lowest point in six months, and down about 53% from its December highs. So what fueled the optimism in DryShips shares last week? It's simple.

The BDI's freefall since December left the market panicky, so even the smallest bit of positive news now will probably be considered an opportunity to jump on to dry bulk shipper shares. Moreover, whatever little the BDI gained in the past few days was because of an increase in capesize ship rates. Since several of DryShips' capesize contracts are near expiry (10 out of 42 carriers that the company owns are capesize) and will have to be renewed at spot rates, any improvement in rates is positive news for the company. The market perhaps factored this in when it pushed DryShips shares up.

Now what: While any uptick in the BDI bodes well for dry bulk shippers, last week's rise in the index can hardly be considered a turning point. We'd seen something similar happen in mid-January, when the BDI gained 4% in just four days, only to crash soon after.

Activity in the capesize as well as Panamax markets remain weak, triggered largely by the new year holidays in China. The nation accounts for roughly 35% of total volumes in global dry bulk trade, so any slowdown hurts the shipping industry. Moreover, iron ore prices have slumped again after recovering slightly in January, indicating persistent weakness in the commodities market. Industry reports even suggest "remarkably high" iron ore inventory at Chinese ports, which could mean lower imports by the nation and, hence, lower shipping activity.

Simply put, headwinds remain, and it could be too early to call the bottom on the BDI. To top that, DryShips has its own set of problems to deal with, namely huge losses and debt load, and negative free cash flow. So a small rise in ship rates will not help the company much, and it needs a bigger outrigger to stay afloat. I don't see one coming anytime soon, and I'm certainly not going to buy into the hype. Stay cautious, Fools.

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Read/Post Comments (4) | Recommend This Article (3)

Comments from our Foolish Readers

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  • Report this Comment On February 09, 2014, at 7:18 PM, jkirchhoff wrote:

    The move in DRYS and the BDI makes perfect sense when you look at the shipping rates charts from the past multiple years. They always bottom near the middle of the first quarter and then rebound strongly after Chinese New Year.

    This pricing pattern is very striking (I believe I saw it on either a blog from MF or SA) and can explain the forward looking nature of the stock market. The mid-January move was a head fake that was too early and it fizzled.

    If you can believe the historical dry shipping rate patterns, the bottom has been put in and this can bode well for future action. Of course, any global economic weakness can mute the upside in shipping stocks.

    Happy Hunting.

  • Report this Comment On February 09, 2014, at 10:50 PM, dgjohnson86 wrote:

    DRYS jumped for two reasons. Positive SA articles, one of which mentions the possibility of a dividend coming from ORIG soon and I believe it's now imminent. The other reason is the end of Chinese New Year and the fact that dry bulk shipping is expected to do well this year, next year and in 2016 too due to a low order book of new ships. If you are some kind of analyst Neha, you should have recognized this before writing this article. It reflects poorly on the Motley Fool that you omitted thefact that most ship owners and analysts expect dry shipping to perform well from 2014 to at least 2016. Maybe I should be writing articles for the fool instead.

  • Report this Comment On February 11, 2014, at 10:51 AM, Nehams wrote:

    @dghohnson86,

    While some analysts are positive, there are others who remain cautious. So it's a mixed bag, as always.

    There are too many variable factors at play in the dry bulk shipping industry -- China, weather patterns, commodity trade, to name a few. Not to forget unprecedented events like Columbia's recent ban on coal loading by a major miner. So any rally in the BDI has to sustain to confirm a recovery.

    You must have also noted that my focus in this post was only on DryShips' last week's rally, which in no way talks about what's coming in 2016. About the company, DRYS has too many cons --losses, debt, suspicious related party transactions, etc. -- to justify a position. The dividend of 25m from ORIG is too small to make a difference to DRYS' bottom line, and ship rates are still too low. DRYS is purely a traders game, and I'm not going to suggest it to prudent investors.

    Thanks for reading!

    Fool on!

    Neha

  • Report this Comment On February 11, 2014, at 10:53 AM, Nehams wrote:

    @dgjohnson86,

    Sincere apologies for misspelling your name.

    -Neha

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