I'm a believer in growth stocks. As an analyst for our Motley Fool Rule Breakers service, I think you should be a believer, too. But even I have to admit some growth stories are bogus, hence this regular series.

Next up: DryShips (Nasdaq: DRYS). Is this dry bulk goods shipper the real thing? Let's get right to the numbers.

Foolish facts

Metric

DryShips

CAPS stars (out of 5) ***
Total ratings 3,232
Percent bulls 88.4%
Percent bears 11.6%
Bullish pitches 479 out of 544
Other peers Britannia Bulk Holdings, Neptune Orient Lines, FreeSeas

Data current as of Oct. 13.

Judging by the comments in CAPS, Fools think DryShips is too cheap to resist but also too risky to own. As my Foolish colleague Christopher Barker wrote in May:

I occasionally see opportunities to anticipate a speculative rally in the shares after bouts of severe weakness, but by no means has this company exited its condition of representing far too high a risk to warrant serious consideration as a long-term investment vehicle. This stock is to be avoided, regardless of the potential gain, unless you have a limitless risk tolerance.

DryShips has underperformed the market in the months since and today trades for 5.3 times current-year normalized earnings estimates and just 4.3 times analysts' consensus 2011 projection, according to Capital IQ.

I'm enticed by those multiples. Trouble is, shipping rates as tracked by the Baltic Dry Index have proven volatile over the past six months, peaking at more than 4,100 in May only to fall back to 2,719 as of yesterday's close. Free-falling rates can't be good for DryShips.

The elements of growth

Metric

Last 12 Months

2009

2008

Normalized net income growth (12.3%) (19.3%) (15.8%)
Revenue growth (11.6%) (24.1%) 85.5%
Gross margin 73.6% 71.9% 79.8%
Receivables growth 78.1% 27.2% 470.9%
Shares outstanding 294.8 million 280.3 million 70.6 million

Source: Capital IQ, a division of Standard & Poor's.

Then again, looking at this table, it's hard to tell if even positive economic forces would be enough to move this stock. Let's review:

  • Dilution is as close to out of control as I've ever seen. But this isn't too surprising. According to Capital IQ, DryShips has executed three follow-on equity offerings since May 2009. The good news? Total debt is now 102.9% of equity, down from 264.1% at the end of 2008. (Still, investors have paid dearly to fix the balance sheet in this way.)
  • Not only has DryShips failed to produce annual income growth on a normalized basis since 2007, but cash flow, too, has been hard to come by. Last year was the first time since its 2005 IPO that DryShips produced positive free cash flow.
  • Much as I like to see the one-year improvement in gross margin, it's more than 6 percentage points lower than what DryShips managed in 2008. Not good.

Competitor and peer checkup

Company

Normalized Net Income Growth (3 years)

Danaos Corp. (NYSE: DAC) Not measurable
Diana Shipping (NYSE: DSX) 12.3%
DryShips (8.0%)
Eagle Bulk Shipping (Nasdaq: EGLE) (18.0%)
Excel Maritime Carriers (NYSE: EXM) 86.4%
FreeSeas 198.1%
Genco Shipping & Trading (NYSE: GNK) 31.1%
Navios Maritime Holdings (NYSE: NM) 12.5%

Source: Capital IQ. Data current as of Oct. 13.

DryShips isn't the worst of this group, to be sure, but it's also very far from what Excel Maritime and Genco have managed. FreeSeas has enjoyed spectacular growth.

But this table could also be deceiving. Analysts project Genco's normalized earnings to fall sharply next year. Excel is also expected to slow some. The very fact that Wall Street expects growth from DryShips makes the stock stand out.

Grade: Unsustainable
And yet I think Chris is right. While DryShips might make for an attractive informed speculation at its present valuation, history says DryShips will continue to burn cash, dilute investors, and eat its returns.

Which brings us to the question asked in the title: Is DryShips worth shorting? I wouldn't. If analysts are even close to correct with their estimates, DryShips' low multiples will expand, and the stock price with them -- maybe not enough to justify the risk of owning the stock, but certainly enough to punish short-sellers.

Now it's your turn to weigh in. Do you like DryShips at these levels? Let the debate begin in the comments box below. You can also ask Tim to evaluate a favorite growth story by sending him an email or replying to him on Twitter.

For further Foolishness featuring DryShips:

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Fool contributor Tim Beyers is a member of the Motley Fool Rule Breakers stock-picking team. He didn't own shares in any of the companies mentioned in this article at the time of publication. Check out Tim's portfolio holdings and Foolish writings, or connect with him on Twitter as @milehighfool. You can also get his insights delivered directly to your RSS reader. The Motley Fool is also on Twitter as @TheMotleyFool. Its disclosure policy thinks Monty Python is sustainably funny.