Why Shares of DryShips, Inc. Stock Are in Hot Water Today

DryShips’ weakness is due to mostly to a macro catalyst.

Mar 24, 2014 at 7:40PM

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 shipper DryShips (NASDAQ:DRYS) were anchored down as much as 7% following worrisome economic news from China.

So what: Demand from China is widely considered the No. 1 factor that affects global shipping rates. Meanwhile, DryShips is easily the most popular and widely known stock of the sector. When macro news hits the entire sector, good or bad, the knee-jerk reaction to DryShips tends to be more profound.

It was reported that China's manufacturing data contracted for the third straight month and was at the lowest level in eight months. Its Purchasing Managers' Index is at contraction levels, as opposed to expansion. The index went from 50.2 in February or very slight expansion to 48.1 for March. Anything under 50 is considered contraction.

Output and new orders were described as down sharply. The weak data follows other worrisome economic data such as retail sales, production, trade and investment for January and February.

Now what: Ma Chunhua, owner of Dadong Shoes, stated, "I don't see more orders coming, and it is still very hard to attract clients from overseas." The concern here is that if China's economic performance continues to get weaker than expected, it will inevitably lead to reduced volumes of ships for dry bulk goods. Reduced shipments would lead to reduce rates, and companies such as DryShips could see their operating profits drop to losses.

China is targeting a 7.5% growth in gross domestic product, but expert economist Robert J Shapiro warns that it could end up being as low as 4% instead. Shapiro reasons that a credit bubble for unsustainable industries is to blame, and there is no way out of it except for maybe and hopefully a soft landing. Shapiro says, "We have seen significant slowdown in China."

DryShips has been expecting increased demand from China and is in the process of positioning its fleet to take advantage of daily spot rates and away from long-term fixed contracts. This leads to higher potential revenue and operating profits but much greater risk if a slowdown in China volumes starts to materialize. Fools should monitor the economic situation from China closely.

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