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The sprawling valley of disconnect between sound investment vehicles and high-risk speculation has never appeared so wide.
Particularly in times like these, cultivating effective risk assessment becomes all the more critical for individual investors. As Goldman Sachs made crystal clear in its testimony to Congress regarding sales of debt securities that were allegedly designed for failure, it's "buyer beware" out there.
Although I missed out on tremendous returns by avoiding Teck Resources (NYSE: TCK ) last year, even as I ascertained that the company was priced for outright failure, I am careful never to second-guess an investment decision that is based upon sound risk-assessment protocols.
Within the rough-and-tumble realm of dry bulk shipping, no stock better illustrates the potential pitfalls of speculative fervor than DryShips (Nasdaq: DRYS ) . From the time I issued my last call to abandon ship, just as the equity markets were beginning to rally, DryShips shares have suffered a double-digit decline on top of share dilution that added insult to financial injury. As Fools well know, the S&P 500 has rallied significantly during that period, resulting in a woeful underperformance from this battered seafaring stock.
The curious shipper reported another disappointing quarterly performance that missed analysts' expectations on both the top and bottom lines, DryShips continues to bounce along the bottom of the sector that has endured an array of daunting challenges: from a structural oversupply of vessels to persistent uncertainty over the safety of debt and the availability of credit among maritime financiers. DryShips reported only $5.7 million in income for the first quarter, with revenue lost from the relocation of a drillship to the Black Sea for use by Petrobras (NYSE: PBR ) offsetting much of the modest improvement seen in dry bulk operations.
Much of the company's fate now hinges upon the performance of existing and pending drillship assets as opposed to its operations in the dry bulk segment. Both the oil spill resulting from the sinking of a Transocean (NYSE: RIG ) platform in the Gulf of Mexico, and the gathering uncertainty over the timing of DryShips' intended IPO of the drillships unit, have contributed to a fresh round of selling pressure. With the rigs under construction still failing to attract contracts, the measurable risks from DryShips' highly leveraged debt position have returned in earnest.
Under trying circumstances like these, Fools are advised to maintain a giant label of "speculative-grade" emblazoned across the hull of this high-risk stock. I continue to recommend that investors eager to enter the dry bulk sector focus their gaze upon lower-risk operators like Diana Shipping (NYSE: DSX ) and Genco Shipping & Trading (NYSE: GNK ) .
I've added DryShips to my Motley Fool CAPS portfolio, purely as a high-risk bet that recent weakness will yield another speculative rally in the near term. When the risks are simply too great to warrant the deployment of real capital, I find that Motley Fool CAPS offers a zero-risk, even therapeutic outlet for the speculator that arguably lives within us all.
I have issued my short-term outperform pick for DryShips over at CAPS, and I fully expect to end the pick over the coming months with another modest gain. Whether you consider the stock investment grade or risky speculation, in CAPS we only wager ideas. Join the free community today and voice your opinion about DryShips' suitability for investment capital.