World's Scariest Stock: DryShips

Ahoy, investors! Methinks me sees a ghost ship cresting the horizon. Sails tattered, the Jolly Roger hoisted -- why, it's not just a ghost ship, it's a ghost ship manned by pirates, arggh! And its brig is crammed with the lost souls of investors, imprisoned behind the iron bars of logic.

The Flying Dutchman, you say? Nay, landlubber. This is something faaaaar scarier. This is Athenian cargo carrier DryShips (Nasdaq: DRYS  ) .

Gasp! What's that sound?
Originally chartered to ferry loads of coal, steel, and other commodities across the waves, DryShips bears a different cargo today. You can hear the wails of lamentation emanating from its hull, the moans of investors who've publicly panned DryShips' stock on Motley Fool CAPS -- and suffered the consequences:

TMFOtter: "In the 1990's, the last time capital was cheap, [DryShips CEO George Economou] took an identical company public and evaporated every last penny of shareholder capital."

Steve819 [Quoting Barron's editor Kathryn M. Welling]: "When someone asked why he was [taking his company public, Economou] actually said, basically, 'Because Americans are the dumbest investors around, and there's lots of liquidity in this market.'"

Allstar13913: "The CEO is crooked, and directly owns a competing company." (privately owned Cardiff Marine, Inc.)

TMFEldrehad: "'We do not intend to sell shares,' [Economou] said. This means the company can put a big part of equity back into buying vessels. Economou added: 'We can deliver more money for every dollar invested in the company.'... [S]elling shares in a secondary offering will result in more equity with which to buy ships, but that's not what he's saying -- he's saying not selling shares translates into more equity. I need some Dramamine, because my head feels like it's spinning from trying to understand this."

These CAPS players have three things in common. First, they're all extremely leery of DryShips' management. Second, they're all good enough investors that their concerns should be your concerns, too. Each and every one ranks in the top 1% of investors tracked by CAPS. Third and finally -- they've all lost big time in their bets against DryShips, in some cases, seeing the stock rise more than 1,000% since placing their bearish bets.

Madness
Has an epidemic of insanity swept the coast of CAPS-land? Or is there truly something wrong with DryShips? As one of the many investors who've seen their CAPS ranking decimated by betting against the company, I've asked myself this question more than once. But the more I look, the more I see red flags waving alongside the skull-and-crossbones at DryShips. Consider a few numbers:

Price-to-Book

Profit Margin (trailing 12-month)

CAPS rating (out of 5)

DryShips

7.2

63.9%

**

Diana Shipping (NYSE:DSX)

4.9

56.4%

*****

Excel Maritime Carriers (NYSE:EXM)

4.5

36.4%

****

Eagle Bulk Shipping (NASDAQ:EGLE)

3.3

30.4%

****

Quintana Maritime (NASDAQ:QMAR)

3.1

26.6%

*****

Data from Yahoo! and CAPS.

In what sane universe do capital-intensive companies like these deserve multiples to book value approaching those of asset-lite profit leaders like Google and Microsoft?

And while I'll grant you that the dry bulk shipping industry is booming, I fail to see why a single player within this industry -- DryShips -- should enjoy a valuation more than 50% higher than its nearest rival, and more than twice that of some of the ships giving more distant chase.

Sure, it gets the best margins of the bunch, but that just raises more flags. Reviewing DryShips' results, we see that much of its profit over the past year was derived from gains on the sale of assets. Meanwhile, the firm's cash flow statements don't show this supposedly wildly profitable firm generating any cash profits since its IPO. On the contrary, over the last year, the firm has burned through nearly $500 million in free cash flow, as its long-term debt ballooned from $418 million to $728 million. Somewhere, this corporate ship has sprung a leak.

If DryShips can't generate free cash flow on sky-high margins, I shudder to think what will happen when those profit margins splash back down to sea level. And you should to -- because this is the scariest stock in the world.

Spread the word. Go to CAPS and rate it an underperformer now.

Want to know what other companies give us the frights? You can view the rest of our hair-raising stocks here.


Read/Post Comments (34) | Recommend This Article (74)

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 29, 2007, at 1:51 PM, davidmg00 wrote:

    U don't understand this company at all

  • Report this Comment On October 29, 2007, at 2:39 PM, MoreCash4Me wrote:

    You have missed the "boat." I bought this stock in my real porfolio at the same time as in CAPS. I have since taken my cost 100% profit off the table and let the remainder run. I am up another 200% since that time (unrealized gains). This sounds like a "wounded bear" to me. If I am wrong, I only doubled my money. Don't you just hate it when that happens?

  • Report this Comment On October 29, 2007, at 3:45 PM, cmebot07 wrote:

    Motley Fool does not understand the dry bulk sector.

    Rate it an underperform in CAPS? Why, so their "All-stars" will do better?

    Its sad when a virtual game created by MF is being exploited in the best interest of MF...

  • Report this Comment On October 29, 2007, at 4:13 PM, goriller wrote:

    Is this story titled "The Bear's Lament" or "Shorty's Last Best Hope"?

  • Report this Comment On October 29, 2007, at 4:20 PM, audiophule wrote:

    Point by Point:

    First paragragh: Ssys nothing.

    Second paragraph: Says nothing.

    Third paragraph: Says nothing.

    TMFOtter: Speaks of Alpha Shipping... Here's the story about Alpha: "The second charge against Economou is even more unfair. About a decade ago, Economou used a different company to raise money for his first shipping fleet, called Alpha.

    The company did not issue stock. A consortium of largely Swiss banks sold junk bonds issued by Alpha to European institutional investors. The shipping market collapsed in the following months and the underwriting banks repurchased the bonds from institutions at fire-sale prices. Then Economou made a settlement with the banks in which he paid more than they had -- 37 cents on the dollar -- to redeem the bonds and take back control of the ships. This took place on the Isle of Man, another of those funny places where shipping companies are incorporated. While Economou got, in effect, $1 worth of ships a few months later for every 37 cents he spent, the banks still made far more money out of the deal than he did."

    Steve819: That has been asked and answered. He did not say it, and because it is written, it does not mean he did say it. He denies saying.

    Allstar13913: Why does owning a private company in the same business make one a crook? Yes, he owns it, and in doing so, DRYS shareholders benefit greatly. Better bargaining for rates and ships due to clout of being 6th largest bulk shipping management company in the world. How else can you run a $5 billion company with two employess?

    TMFEldrehead: Ever try to understand someone who does not speak the same language? There are translation errors. The company is growing like crazy and every deal thus far has been accretive. Can you ask for better?

    Fourth paragraph: Says a lot. They were wrong. Lost their asses.

    Fifth paragraph: Number. Price to book is a stupid number. You buy a ship. You begin depriciating it on the books. That's accounting. In the meantime, the ships value may or may not actually go down. In this case they have SCREAMED up. So if a ship is carried at $20 million on the books, but its worth $100 million on the market, who cares what the purely theoretical book value states?

    His commment about multiples...DRYS is at 31 now, it will drop to 18 after Q3 earnings. Not MIGHT, will! Google and Mirosoft are 53 and 24. And MSFT was higher before recent earnings.

    Answer to why a single player should enjoy a 50% higher valuation: They will earn 4 times as much in the next 52 weeks is why.

    Yes, since its IPO when it had 6 ships it has spent its cash flow buying ships that will now earn over 1.4 billion dollars next year at current one year rates.

  • Report this Comment On October 29, 2007, at 4:50 PM, iceman1973 wrote:

    Say What? The closer you look? Maybe you should look a little closer. 1)A forward P/E of 8.69. 2) seven new ships will be bought over the next 3 years. 3)only 4% of dryships business is within the US. 4)because of its heavy use of spot pricing, it has significant exposure to further price changes. each $1,000 increase in spot prices puts an extra 35 cents per share of earnings on the company's income statements.

    Sounds bad to me!!

  • Report this Comment On October 29, 2007, at 5:00 PM, dab007 wrote:

    the money was spent buying ships smart when rates are today at an all time high and should contiue rising if you have missed the rise so far and i have not i got in originaly less than 11$ per share why not get in now. if you cant get them join them their next year pe is less than any other dry bulk shipper i have found and zacks ranks them a 1 top buy cadegory and vestor vest has them at a fair value of 192.00 strong buy way above their current price. dave busch

  • Report this Comment On October 29, 2007, at 5:57 PM, imacg5 wrote:

    A stockpicking game like Caps is one thing. But you have done a tremendous disservice to Fools who look to you for advice, and are losing real money based on your advice. You are teaching people to ignore the information that is out there, in favor of personal attacks against the CEO, and treating a 800% rise as being scary , instead of calling it what it is , a success. All the other highly rated drybulk shippers in your story are in the same sector and do the same thing, except for one important difference. DRYS leases their ships at Spot, or short term rates, which is why they get $190,000 per day for a capesize, while Navios gets $50,000. Sounds like George is pretty smart. Jefferies, and Cantor Fitzgerald have very smart analysts, and they raise their Earnings estimates constantly. Warren Buffett, John Chambers, and others say China is not slowing down. They build a new COAL-fired electric plant every month, they are building new cities every year, the steel comes from IRON ORE. The proof will come out in a couple of weeks, earnings will blow away estimates, and your PE calculations will need serious adjustments.

  • Report this Comment On October 29, 2007, at 6:10 PM, egarl wrote:

    Comparing Drys to others like Navios (NM) is constructive. NM has ships locked into $17,000 a day rates until 2017

    when the current spot rate is $80,000 plus.

    Guess who will report better earnings. I think DRYS will have 08 eps of $16to $20 per share

  • Report this Comment On October 29, 2007, at 7:22 PM, imacg5 wrote:

    Rich Smith did all his research at the Comedy Store, and he isn't funny. DRYS spent all their FCF and alot of debt since it's IPO on growing from 6 to 42 ships, and it was a great investment, ship values have more than doubled. Do you know what the Baltic Dry Index is? It is the going rate that the CUSTOMERS are willing to pay to get their product to it's destination. and for the last year it has tripled, because China, and India NEED more Iron Ore, Coal, Cement, Fertilizer eyc. than ever before. And they aren't slowing down. This is research, not gossiping about the owner. DRYS is at $130, some of you probably said AAPL and GOOG were astronomically priced when they were there, and DRYS real PE is in the single digits. Debt? If you have a mortgage at 6%, and you have a trading account where you make 50% return, are you going to take money out of your trading account, to pay off your mortgage?

  • Report this Comment On October 29, 2007, at 9:04 PM, JuniorBuffet wrote:

    seriously? are you going to tell people to rate this stock an "underperformer" when it's been the leader in relative strength for the last year gaining over 600% YTD? This article was just flat out pointless. Jeez, way to use Halloween to mask your vendetta against a stock that has made rational and logical investors lots of money. Shorting the shipping sector right now? really? GO BACK TO SCHOOL AND LEARN ECONOMICS.

  • Report this Comment On October 29, 2007, at 9:52 PM, hopeful12 wrote:

    Please understand the concept of working capital. Investing all available cash in ships to take advantage of daily spot rates given the upslope of the Baltic Dry Index is common sense. Particularly in light of global expansion and a shortage of ships. Watch the Baltic Dry to gain a good sense of the stocks moving direction. The daily trading range is not for the faint of heart and the shelf filing is to raise funds for new ships which may, or may not, be necessary because it's farther off than we can accurately predict. Someone help me out with the shelf filing!

  • Report this Comment On October 29, 2007, at 11:00 PM, TMFDitty wrote:

    With the day's comments just about all in, I want to thank everyone for their contributions... and hand out the awards:

    1. The prize for "most constructive criticism" goes to audiophule for a detailed and lucid rebuttal.

    2. The prize for "best comedic response" goes to goriller, offering up not one, but two eminently swipable article titles.

    And to all, a good night.

    Foolish best,

    Rich Smith

  • Report this Comment On October 30, 2007, at 5:34 AM, Allstar13913 wrote:

    Rich,

    I'm sorry these idiots attack you. This is a problem with a lot of my pitches on CAPS.

    People with no score, and no idea what they are talking about jump all over you for sharing your thoughts.

    Pumpers beware, the term irrational exuberance comes to mind. Prices can't always go up. I know I'll have the last laugh on this stock.

    Allstar13913

  • Report this Comment On October 30, 2007, at 11:09 AM, goodsort wrote:

    DRYS reminds me of many arbitrage investment strategies -- financing long-term liabilities (ships) with short-term funding (spot rates). CEO and CFO are one in the same - with 70% ownership in the operating company (crews, maintenance, etc.). Shares outstanding will increase by 1/3 again (doubled last year). Biggest benefactor of dividends is one in the same (CEO/CFO). Corporate governance? Investment banks promoting shares so they can exit by selling you even more expensive shares. Historic PE's are meaningful and the bulk of the dry bulk world is a ship of fools due for a fall. My 2 cents.

  • Report this Comment On October 30, 2007, at 3:36 PM, twonder wrote:

    Thanks Rich,

    due to your inflamatory article there will literally be no Christmas in my home this year. Just sold my shares at an incredible loss. No need for you to have done what you did base on limited research.

  • Report this Comment On October 30, 2007, at 5:06 PM, zmaniac wrote:

    Normally I don't click on links to Motley Fool articles, but the sensational headline caught my eye. I don't own DRYS but I do own DSX, which I have a tidy profit on, and was wondering why it dropped 12% today on no real news. This article appeared on a Yahoo Finance link for DSX. I don't know if it contributed to that drop, but after reading it, I am reminded of why I stopped reading MF. Sensational headlines, dubious "analysis" without any close examination of financials, "recommendations" based on self-interest, ending with a pitch to a MF product, are all things that lead me to be leery of MF itself. Why would I trust the analysis of complete strangers with no verifiable financial resume solely based on an arbitrary rating generated by the website itself? I used to respect the Motley Fool years ago, now I just generally stay away.

  • Report this Comment On October 30, 2007, at 5:13 PM, hopeful12 wrote:

    The meltdown was due to a pullback in the Baltic Dry along with heavy profit taking and the impending dilution from additional shares. Look for a bounceback.

  • Report this Comment On October 30, 2007, at 6:41 PM, bb130 wrote:

    I did not see that meltdown coming. All of a sudden. I was in at 120$ doing day trades and had done well with it today usuing Macd and S with an ok market.....But zoooom. A very well planned assualt on the stock obviously. Now its 110$ in the aftermarket. And there is the Fed Meeting. Will it go back to 120$, or 115$.....ouch. When will the attack be over? Someone went short and their associates attacked. So now do they buy buy and do it again? Or take it back to 105?.....BB130

  • Report this Comment On October 30, 2007, at 7:53 PM, egarl wrote:

    It't 10/30 and drys has dropped $22.00 today on reports that cape rates have dropped and foolish investors reading that drys is a scary stock on TMF. The cape rate is down 4% today after being up 190% from same time last year. Meanwhile panamax rates are up. Point 1- drys has 5 times more panamax than capes.

    Point 2- if the rates drop another 30%(which could happen if China stops importing) DRYS will still make $12 EPS next year.

  • Report this Comment On October 30, 2007, at 11:22 PM, FoolMe77 wrote:

    If these "top 1%" investors have been so wrong about Dryships in the past, what, pray tell, makes you think they are right now? Seems to me these people have proven, that when it comes to the dry bulk shippers, they just don't have a clue. There is nothing in the article to indicate otherwise. Taking their advise would be like hiring a pedophile to babysit.

  • Report this Comment On October 30, 2007, at 11:35 PM, JJMcGough wrote:

    twonder,

    Not too late to buy in again. Send me your children's wishlists and we will see what I can do to make up the short.

    Jeff

  • Report this Comment On October 30, 2007, at 11:44 PM, lollefool wrote:

    This evening (10/30/2007) Forbes.com had the following to say:

    "DryShips shares slid 17.5%, at the close. DryShips shares soared from $13.85 on Oct. 31, 2006 to $130.97 at the close on Oct. 29, 2007, before an article entitled World’s Scariest Stocks: DryShips was published on The Motley Fool on Monday, spooking investors. The site questioned DryShips' profitably. As investors started selling DryShips it sent waves through the market causing all the dry bulk shippers to tumble."

    See it wasn't JUST the Baltic Index, it was Fool author Rick Smith disobeying the Fool Rules by posting "disruptive" comments about this stock. AND NOW, another FOOL has done the same thing with "Scarey Stocks: Research in Motion"!!

    I discontinued my membership in Motley Fools a few months ago. The name says it all. The Fools write the stuff and then fools read the stuff.

  • Report this Comment On October 30, 2007, at 11:51 PM, JJMcGough wrote:

    twonder,

    Not to late to buy in again. Send me your children's wishlists and we will see what I can do to make up the short.

    Jeff

  • Report this Comment On October 31, 2007, at 12:55 AM, RSInsight wrote:

    That end of day swoon was crazy. I like this company, and even if dilution and a tick down in the BDI are in the making, DRYS is still undervalued based on 07 and 08 earnings.

    The explanation I got for today's sell off was that the Chinese are threatening to pay NO INCREASE for iron ore shipping next year. My theory is they'll either pay the going rate (BDI), or live in huts. According to the Cantor Fitzgerald analyst, this is just a ploy by the Chinese. Seems to have worked today. I bought in at 108.50 for the bounce...it was trading at 111.75 at the end of after hours.

    And by the way, using Price/Book without attaching PE in the data is completely irresponsible. Any book on Security Valuation will tell you that simply buying low price/book is a loser's game. Earnings drive stock price, and Dryships has more and better growth than competitors.

    good luck.

  • Report this Comment On October 31, 2007, at 12:20 PM, quitefool wrote:

    What caused yesterday's slump in drybulk sector? Well, there has been a couple of articles and comments about drybulk markets published lately, which did not bother much to investigate all the factors, which cause the high shipping prices now and the sector's confidence in the coming years. The writers concentrated only on the number of new ships coming to the market, and did not analyse other factors that influence on drybulk shipping:

    - the increasing need of commodities in the world economy, which is growing ca 6%/year. Urbanization of China, India and the rest of Asia, Pacific Asia, Russia, Middle East and even Africa consumes awfull amounts of iron ore, all kinds of minerals, cement, coal etc. In ten years time China will build over 500 coal fueled power plants, because oil is too expensive (and they don't need to bother much about environmental questions, they have not signed any of those international agreements, e.g. Kioto). The mountains of coal those 500 plants will need in future will already slurp the 500 newbuild Capes ordered.

    - demolition of ships. 30% of the world's fleet is older then 20 years, 15% is older that 25 years. 23% of Panamaxes and 18% of Capesizes are older than 20 years. Now the commodity producers and the harbors are setting requirements to the loading ships, and many of them (Australians!) do not accept ships older than 20 years.

    - another thing that is expected to increase the ship demolition is the lack of skilled manning.The shipping companies are already now alarming about to get skilled workers. The crews from older ships will naturally move to newer ships.

    All of these things will affect the number of available ships in the future. I think the shipping companies know their business and have not overexaggerated their newbuilding orders.

    Many people say that yesterday's strong slump in drybulk shipping stocks was also caused by shortsellers, who have gotten really scared in front of the 3Q earnings releases, and tried to push the stocks as low as they could. Who knows, but sounds quite reasonable.

    A few day's sharp drops of the BDI index are usual in the shipping world.Up and down. The recent rice of BDI has been really hefty, and a correction was naturally expected.

    But if the situation would be so bad in the shipping world, I think nobody could have got yesterday a 2 year contract for a Cape at USD150.000/day and a 2 year contract at USD78.000/day for a Panamax :)

  • Report this Comment On October 31, 2007, at 5:07 PM, cm202bc wrote:

    Well, I would just like to provide a respite from the rest of this negativity to thank Rich. Sure his research was lazy, his conclusions intentionally hyperbolic, but he played a fine part (along with many other factors) in me getting my last 1/3 into DSX at a 13% discount.

    I would encourage everyone to continue reading the MF. It's a fine source of data with a proven history and a consistent, rational strategy. But remember, there's a reason you pay for some folks advice and you get some for free.

    Right Rich?

  • Report this Comment On October 31, 2007, at 5:28 PM, VELOCE100 wrote:

    I own DRYS; wish I owned more. Mine has doubled and put me in the fairly exclusive "200 SCORE" club. I'm #81 out of 3246. Thanks DRYS.

    Zacks rates it #1. IBD ranks it #8 out of top 100, but thinks it's substantially overpriced. It's NOT the scariest with a PE of about 13. How far down could it go???

  • Report this Comment On November 01, 2007, at 2:48 AM, JudasTouch wrote:

    Thanks a lot, Rich!

    Not only will there literally be no Christmas this year, but your article also killed the Easter Bunny--no chocolate rabbits this year, Rich! What's worse, your trashy, sensationalist hitjob somehow managed to kill Christopher Columbus all over again, and you know what that means--no Columbus Day in my home this year, Rich, literally. I suppose I should be glad this Motley Fool crap didn't kill the Tooth Fairy, too, and I would be, but your article caused all the teeth in my kid's head to fall out. How am I supposed to afford this, Rich? You know what bicuspids are going for nowadays!?

  • Report this Comment On November 01, 2007, at 5:52 AM, JudasTouch wrote:

    Thanks a lot, Rich!

    Not only will there literally be no Christmas in my home this year, but your article killed the Easter Bunny, too--literally, no chocolate rabbits in my home this year, Rich! Your trashy, sensationalistic hitjob also somehow managed to kill Christopher Columbus all over again. You guessed it--no Columbus Day in my home this year, literally. I suppose I should be thankful your article didn't kill the Tooth Fairy, too. I would be, but your article made all the teeth in my kid's head fall out. We're talking bicuspids, Rich; you have any idea how much bicuspids are going for nowadays!?

  • Report this Comment On November 01, 2007, at 9:08 AM, Allstar13913 wrote:

    lol. Everything is our fault. No shock there.

    What else can you blame us for? The Subprime bubble?

    Allstar13913

  • Report this Comment On November 05, 2007, at 5:24 PM, topmo wrote:

    Just noticed that DRYS has called a meeting to discuss their "profits" for this quarter.....10:30 AM, Nov. 6th, this has been moved up from the 20th. What is the reason? Good news that the CEO does not want to keep under wraps? We shall see....could be super blow out earnings, much better that GOOG or AAPL. With a much lower PE, to boot. So stay tuned, folks, looks like this could be a nice bounce of the 50 day MA. Similar to the 2 large pulbacks within the last 6 months. It's good that DRYS has had this time to consolidate, can't go up forever, has to take a breather before continuing upward,... that makes this a stronger and more resilient stock.

  • Report this Comment On November 05, 2007, at 5:30 PM, topmo wrote:

    Earnings report after market closes, Tues. Nov. 6th. Let's see what happens .....how much will this company report and what are the future prospects?

  • Report this Comment On July 25, 2011, at 6:16 PM, XMFConnor wrote:

    Wow. This article pretty much called the top of the market... I am now interested in buying... but at $3.83 not $113+. GREAT article.

    For all those fools (lowercase f) who bashed the article and ignored some really great investors wisdom, I hope you didn't lose too much money, but did learn your lesson. Just because a stock goes up-- even if it's 600%, doesn't mean it is warranted.

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