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Why DryShips, Inc. Stock Is Smooth Sailing Today

By Nickey Friedman – Feb 6, 2014 at 5:00PM

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DryShips is having a relief rally due to a macro factor.

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of dry shipping company DryShips (DRYS) are buoying nearly 6% following news of the biggest one-day rally in the Baltic Dry Index, or BDI, in weeks.

So what: The market hopes that today began the start of a reversal in the BDI which has been cut by well over half since reaching highs in December. The BDI is a basket of shipping routes and the market rates for the daily spot prices of those routes. DryShips has a large number of Panamax ships that make their revenue from prices that are a direct function of these market daily spot rates. The much lower spot rates have negatively affected DryShips earnings and cash flow. If the upward trajectory of today and to a less extent yesterday continues, it will improve the earnings and cash flow of DryShips as a company.

Now what: On Jan. 29, Navios Maritime Partners (NYSE: NMM) released its fiscal-fourth-quarter earnings and held a conference call. CEO Angeliki Frangou gave a very bullish account of the forward outlook for the dry shipping industry. She mentioned that "the drybulk environment has brightened significantly" and "the cycle is turning." If Frangou is correct, the upturn in rates the last two days could be the start of a much more extended rally which could put more cash in DryShips' coffers. Follow the daily spot prices to see how this plays out as well as listen to each dry shipper's conference call for the latest firsthand details.

As of three days ago, Global Hunter Securities concurs with Navios. It expects that by mid-February the factors that have plagued the dry shipping industry could end. Storms, flooding, seasonality, and the Chinese New Year celebrations have all temporarily negatively affected shipping rates. Global Hunter Securities believes this is an "opportune time to increase positions in this sector." A combination of analyst recommendations and rising rates could be the perfect storm for stock prices to rise. However, Fools should still be cautious with DryShips because the company has a history of large net losses and dilution. Analysts expect earnings per share of $0.28 this year, but that includes its drilling subsidiary Ocean Rig UDW.

Nickey Friedman has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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