What happened
Shares of DryShips Inc. (DRYS) rallied more than 10% by 2:45 p.m. EDT on Monday. Several factors seem to be driving the stock higher.
So what
Shipping stocks are broadly higher today. One catalyst propelling the bullishness is that the Baltic Dry Index is rising for the third straight day and is currently toward the upper end of its 52-week range. The index, which measures changes in shipping rates, is thought to be a leading economic indicator for future shipping demand. So if the index rises, it suggests that the rates shipping companies can earn when leasing their vessels to customers should increase, which would boost the profitability of companies like DryShips.
Image source: Getty Images.
Also adding fuel to the shipping sector rally is a rebound in Chinese stock prices, due to a more optimistic outlook on its economy. Because China is a big shipping market, a rising tide in China would, in theory, lift all boats, including the shipping demand.
On top of that, the Trump administration has announced a withdrawal from the Universal Postal Union, which helps hold down shipping costs for developing countries. The administration, however, believes that China and others are using it to gain a competitive advantage over the U.S. The withdrawal could help boost shipping rates, which would also benefit a company like DryShips.
Finally, another news item relating to DryShips is that its CEO George Economou will receive $134 million from the sale of offshore driller Ocean Rig UDW (ORIG) to Transocean. Economou was the CEO of the former DryShips subsidiary until the end of last year, when he stepped down from the company, which subsequently agreed to a $2.7 billion buyout from Transocean. That cash infusion could end up benefiting DryShips down the road, since the company's founder could use the money to buy more shares or ships from his shipping company.
Now what
Investors are growing more bullish on DryShips' prospects after reading into several slightly related news items. While it's possible that shipping rates will improve due to a stronger Chinese economy or the U.S. withdrawal from the Universal Postal Union, they could just as easily sink if the trade war between the U.S. and China continues escalating. Add that potential for more volatility to DryShips' abysmal track record at creating value for its investors, and investors will likely be better off watching this rally from the sidelines.
