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Why DryShips Inc. Stock Is Sinking

By Nickey Friedman – Oct 9, 2014 at 1:17PM

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A trio of factors is keeping DryShips below sea level.

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 DryShips (DRYS) are in hot water today, having fallen as much as 6.8% yesterday and continuing to plummet today following a downgrade on its majority-owned Ocean Rig UDW (ORIG) subsidiary, continued weakness in dry shipping rates, and a discouraging outlook from the Baltic and International Maritime Council, or BIMCO.

So what: First, "TheStreet Ratings" downgraded Ocean Rig from a buy to a hold, leading to an above-average volume sell-off. Since DryShips owns approximately 78.3 million shares of Ocean Rig, the sell-off represents a $40 million to $70 million decline in the stock's holding value. Since a large percentage of DryShips' market cap is based on this publicly traded holding, a reduction in value of Ocean Rig stock tends to be a reduction in value of DryShips stock.

Second, the dry shipping market as measured by the Baltic Dry Index, or BDI, continues to be quite weak, down 2.4% yesterday. The BDI measures change in the daily spot rates based on a basket of various ships and routes, and continues to be significantly lower than this time last year. For example, the average Capesize rate is down 60% year over year and the average Panamax rate is down 57%.

Third, BIMCO came out with a dim report on the state of the dry shipping industry. Cited among other things was the International Monetary Fund lowering its outlook for global economic growth. Since shipping demand is derived from global economic growth, BIMCO reasons, the lower-than-expected outlook spells lower-than-expected shipping demand. BIMCO's chief shipping analyst, Peter Sand, stated that "widespread negatives seems to outweigh the positives this time around."

Now what: Considering the triple whammy of bad news, DryShips quite frankly is lucky to be down only as much as it is. Going forward, the best hope for DryShips stock is its Ocean Rig subsidiary outperforming with results and proving negative market sentiment wrong. A sharp rise in Ocean Rig stock all but certainly means a sharp rise in DryShips stock.

As for dry shipping, Sands and BIMCO have flip-flopped a lot on their outlook, so you might want to take it with a grain of salt. If history is any guide, daily spot rates can and often do turn on a dime, and even BIMCO might not see it coming. As an example, last year at this time, Capesize rates were around 200% higher than BIMCO's forecasts, Panamax's around 100% higher, and Supramax's 30% higher. Normally, the fourth quarter sees a sharp rise in rates, and it's possible that the season is just getting off to a late start.

Watch for improving fundamental results from Ocean Rig or sudden revival in shipping rates to see if DryShips will be heading back up. Likewise, keeping an eye on both of these stocks is important to see if there may be more downside ahead.

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.

Stocks Mentioned

DryShips Stock Quote
Ocean Rig UDW Stock Quote
Ocean Rig UDW

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