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

The Baltic Dry Index's small gain doesn't justify the sharp bounce in DryShips shares.

Feb 9, 2014 at 6:15PM

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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Neha Chamaria and The Motley Fool have no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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.

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