DryShips Inc. (DRYS) was able to charge customers roughly 60% more for the use of its bulk carriers year over year in the third quarter. Diana Shipping Inc. (DSX) was able to up its rates 45%. Despite similar directions on rates, the stocks performed very differently. Dryships' stock advanced 60% in 2018, while Diana Shipping's shares fell nearly 22%. Does that make DryShips a better buy than Diana, or vice versa? Or, perhaps, there's a third answer to consider, here. 

Back from the abyss

Even after the massive 60% stock price advance in 2018, DryShips shares have basically lost all of their value over the trailing three- and five-year periods. So, that huge return in 2018 was a bounce off of a very, very low base. What happened?

A dry bulk carrier at sea

Image source: Getty Images.

The easy answer is that the dry bulk shipping industry fell on hard times. The rate advance in 2018 shows that. But this simple fact doesn't explain the full depth of the issue at DryShips. Diana's share price "only" fell 75% over the past five years and is actually up 20% over the trailing-three-year span. There was something else going on at DryShips, and it wasn't good.

While times were tough, DryShips entered into a deal with founder and CEO George Economou for a cash infusion. Following that late 2016 agreement, the company then agreed to sell new shares to a third-party investor. Despite elevated leverage, the company didn't use the cash to pay down debt; it went on a buying binge.   

The outside investor, meanwhile, decided to sell the shares. That move, coupled with the massive dilution caused by the stock issuance, pushed the stock to painful lows. It was so bad that DryShips underwent a number of reverse stock splits to keep the stock price from falling below exchange minimums. Motley Fool's Matthew DiLallo estimates that all of the reverse splits would have amounted to a single 1 for 7,840 reverse split. Yikes!

DRYS Chart

DRYS data by YCharts.

With results starting to improve in 2018, it looks like investors basically breathed a sigh of relief, rewarding the company with a higher stock price because, well, it didn't self-immolate. But the bigger takeaway for investors is that the history here suggests that management isn't putting shareholders first. And for that reason, DryShips isn't a stock worth considering for your portfolio. Note, too, that the company recently bought ships from the CEO, a related party transaction that would seem questionable at a company with DryShips' past. 

A better choice?

After that backstory, Diana Shipping looks like a pretty boring company. Yes, it ran into trouble when shipping rates tumbled. However, it weathered the storm a little better and didn't make strategic moves that were as questionable as those made at DryShips. In fact, after a long string of red ink, Diana's bottom line finally moved back into the black in the third quarter as it reported earnings of $0.13 a share. Through the first nine months of the year, the company made $0.09 a share. 

The company is in good position to keep the good times rolling, as well. At the end of the third quarter, it had $176.5 million in cash on the balance sheet, up from just $40 million at the start of the year. It has since used that cash to buy back stock in an effort to return value to shareholders. Throughout 2018, meanwhile, Diana worked to refinance its debt to extend maturities and, thus, improve its financial flexibility.   

Compared to DryShips, these investor-friendly actions make Diana the easy winner in this match-up. However, that doesn't mean investors should be lined up to the buy the stock. The sharp increase in the rates charged by DryShips and Diana speak to a highly cyclical industry. Rates can fall just as quickly as they rise.

DRYS Chart

DRYS data by YCharts.

In fact, during the third-quarter conference call, Diana CFO Anastasios Margaronis noted that economic risks had risen as 2018 progressed. These risks have only gotten more concerning since then, with the trade spat between the United States and China escalating further, and some European nations starting to show material signs of economic weakness. This helps to explain the weak performance of Diana's stock price in 2018 compared to DryShips.   

To put it simply, the rates DryShips and Diana can charge are highly dependent on economic trends. If there's a global recession, or even just a material slowdown in a key demand center (think China), bulk rates could plummet again. And that would be very bad news for bulk carriers and their financial results. Investors are right to be a little concerned about that risk today.

Most should take a pass

Unless you have a deep understanding of the shipping industry, most investors are better off avoiding both DryShips and Diana Shipping. That's especially true right now since the two companies are so reliant on a strong global economy to support the rates they can charge for the use of their ships. There's just too much economic uncertainty to take on that risk right now. In the end, Diana is the better of the two companies, but neither is really worth buying today.

Check out the latest Diana Shipping earnings call transcript.