World's Scariest Stocks: DryShips

What else is stewing in our cauldron of evil? Prepare yourself before proceeding to the rest of our world's scariest stocks.

The thought of imaginative children donning the garb of their favorite characters conjures an image as sweet as candy corn. But when that trick-or-treater ringing your doorbell is a corporate CEO in a monkey suit, you're in for the fright of your life.

DryShips (Nasdaq: DRYS  ) CEO "Curious George" Economou's furry Halloween costume may disarm you with childhood nostalgia, but inside his bag of tricks lies a fearsome company with a ferocious bite.

Whatever you do this holiday season, please don't buy this stock! I issued a final mayday for passengers to jump ship back in March, on the heels of a $1 billion quarterly loss. Shares have barely budged since, even as stocks have enjoyed a tremendous rally.

Just in time to win your vote as the world's scariest stock, DryShips issued third-quarter earnings this week that once again failed to erase deep-seated concerns about the company's condition and outlook; shares shed nearly 8% in the aftermath. The company earned a paltry $35.6 million, which equates to a terrifying 80% decline from year-ago levels.

With both of the company's offshore drilling rigs deployed under lucrative contracts, and the dry bulk fleet operating near capacity and fully booked through 2010, DryShips' operations have found some semblance of stable footing that its underlying fiscal condition and overall risk profile have not.

The monster at the end of this order book
Given the startling oversupply of cargo vessels implied by the sheer number of ships on order worldwide, and the ensuing potential for a massive maritime credit crisis, the risks to a heavily indebted operator like DryShips or Excel Maritime Carriers (NYSE: EXM  ) can scarcely be overstated. Observing from the opposite end of the risk spectrum, cautious dry bulker Diana Shipping (NYSE: DSX  ) has warned of a "wave of destruction for banks to rival the subprime crisis."

With more than $1.1 billion already invested in advance payments for new vessel orders, DryShips has a lot riding on the planned tripling of its offshore drilling rig fleet from two to six vessels. Although my Foolish colleague David Lee Smith has pointed to signs of recovering demand for the rigs of deep-sea specialists like Diamond Offshore (NYSE: DO  ) and Transocean (NYSE: RIG  ) , DryShips has yet to secure operating contracts for either of its two rigs currently under construction. Brazilian oil giant Petrobras (NYSE: PBR  ) , which has booked one of DryShips' operational rigs, is thought to be focusing future bookings upon vessels built in Brazil. Analysts are hopeful that DryShips will land at least one contract, but this still leaves considerable uncertainty surrounding the final two rigs on order, which will likely have to land contracts of their own before financing is made available.

By contrast, although dry bulker Navios Maritime Holdings (NYSE: NM  ) raised this Fool's eyebrow with an aggressive, counter-cyclical plan to expand its fleet of giant Capesize carriers, that shipper has at least secured long-term charter contracts for all of the vessels on order. I have consistently highlighted Diana Shipping as a solid choice to ride out the perfect storm, but investors demanding a more growth-oriented stance are encouraged to perform due diligence on Navios before gazing at ghoulish DryShips.

Please don't turn the page
If the company's insane track record of mind-blowing share dilution is not enough to give you ghastly goosebumps, then surely that infamous volatility -- with a chart that sometimes resembles the Swiss Alps -- is bound to scare you away. The shipper's trail of horrors is lined with the remains of spurned investors for whom the 95% share-price collapse from its lofty all-time peak may have felt like a zombie apocalypse. Fools were at least fortunate enough to have prior warning, as my colleague Rich Smith nominated DryShips for "Scariest Stock" honors back in 2007 ... mere days after the ship began to spring leaks.

If all of those dastardly danger signs and ghost stories still fail to ward off your speculative spirit, then it's time you went for a swim with "Moby Debt."

The real monster at the end of this book remains DryShips' untenable degree of indebtedness. Although the stinging string of dilutive share offerings helped to reduce total debt from last year's pathetic peak, the company's burden still hovers near $2.5 billion ... or more than 1.5 times the shipper's entire remaining market capitalization.

Boo!

While any investors as yet undeterred may wish to check their temperature for speculative fever, I offer one final glimpse at the madness of DryShips' management. Despite every indignity suffered by DryShips shareholders over the past two years, and even as the deep wounds of debt have barely begun to heal, "Curious George" uttered the most frightening and curious words imaginable: "We are well positioned to take advantage of acquisition opportunities as they arise." 

If such acquisitive aspirations in the face of everything I have outlined above leave you scared out of your wits, then vote "Yes" in the poll below before your fellow Fools are blasted into bits.

Warning: We've rounded up more scary stocks. Click if you dare.

The "Dry Bulk Shipping" tag within Motley Fool CAPS lists 17 companies. Join our online community today and share your views on this important bellwether sector. CAPS is free and fun!

Fool contributor Christopher Barker has sailed through the Bermuda Triangle, but never encountered a sight as scary as DryShips. He can be found blogging actively and acting Foolishly within the CAPS community under the username TMFSinchiruna. He tweets. He owns shares of Diana Shipping. Petroleo Brasileiro is a Motley Fool Income Investor recommendation. Try any of our Foolish newsletters today, free for 30 days. The Motley Fool has a bone-chilling disclosure policy.


Read/Post Comments (4) | Recommend This Article (21)

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 October 30, 2009, at 2:34 PM, HumbleMan2 wrote:

    Your problem seems to be with curious George, not the company itself. This tabloid style stock analysis leaves much to be desired. For example, you state that the company's income is down 80% from last year. This may be news to you, but not to most investors. This shortfall is already priced in the stock which is down more than 80% from last year. Please report all the facts, not just the subset that supports your preconceived conclusion.

  • Report this Comment On October 30, 2009, at 2:55 PM, XMFSinchiruna wrote:

    Oh no, I have plenty of concern that relates solely to the company's position, but surely you'll concede that in the case of DRYS it's difficult to extricate one's opinion of management from one's opinion of the company. For all intents and purposes, DRYS = Economou.

    The earnings decline is the least of my reasons for citing concern about the company. As I mentioned, operations have actually found a relatively stable footing of late. A reminder, however, for anyone calculating what has or has not been 'priced in': that share count has increased by about five-fold since the problems began mounting for DRYS.

    If his statement that DRYS is well positioned to take advantage of acquisition opportunities isn't enough to spook you, then you may wish to grab a thermometer to check for speculative fever. :)

    Happy Halloween, Fools!

  • Report this Comment On October 31, 2009, at 1:33 PM, HumbleMan2 wrote:

    What's the alternative to issuing more shares? (1)loading up on debt (which is not that easy to get anymore even if the company wanted to); (2) filing for bankruptcy. Which alternative do you prefer? The way I see it, the current phase (ending) was survival anyway you could. The next phase is consolidation (starting soon). The third phase is recovery. A recent poll on another respected website on whip dry ship company would lead the third quarter recovery states "As usual, fan-favorite DryShips took the trophy, though somewhat narrowly, receiving some 29.5% of the vote."

  • Report this Comment On October 31, 2009, at 9:42 PM, imacg5 wrote:

    The alternative would have been to sell shares in 2007 when the price of DRYS was between $110 and $120, and DRYS filed a shelf offering for the sale of 6,000 shares. Almost all the other dry bulkers used the combination of SPO's and debt to pay for all the expansion. And most suffered only slight blips to their meteoric price rise. George inexplicably only sold 600 shares.

    Perfect hindsight? Sure, but then George has been given credit for tremendous foresight in going to spot in 2006. So why would George pay $100 million each for Panamax, and $130 million for Capes, in late 2008, when the BDI is plummeting? Because he was buying them from Cardiff, who needed to unload the overinflated ships. And a few months later, he unwound the deal at a cost of hundreds of millions in forfeited deposits from DRYS. Why? Because George owns 10% of DRYS, and 75% of Cardiff.

    You consider a poll from thestreet.com to be a respected source on dry bulk? Hardly, the respected sources in dry bulk are fully aware of the oversupply in dry bulk ships. The value in DRYS is the deep water drillships, and the revenue from them is known, priced in, and not arriving until 2011.

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