You wouldn’t be blamed if you thought DryShips Inc. (NASDAQ:DRYS) had already gone the way of the dodo. The dry bulk shipper was one of the rising stars before the Great Recession and during the go-go commodity boom days. When China had an insatiable thirst for all natural resources, DRYS stock — and shares of other cargo shippers — flew through the roof.
And then the bottom fell out.
As one of the most heavily indebted of the shippers, DRYS floated around in penny stock land after the recession and was constantly considered a bankruptcy candidate. So imagine my surprise when the shipping stock suddenly topped lists of best-performing stocks over a host of time frames.
But at this point, the massive rise in DRYS stock has only created a death trap for all but the quickest traders. This story won’t end well for some, and certainly not for longer-term investors who were sucked in by DryShips’ siren song.
DRYS: Financial Engineering at Work
DryShips stock ran up 70% yesterday, and they’re on pace to fly ahead another 40% today. We’re looking at 1,900% gains in more than a week.
Certainly, DRYS has come across something ground-breaking to warrant such an insane run for a company that by all accounts should be dead, right?
Financial engineering deserves some credit. As we noted, the recession was not kind to DryShips even in the slightest. As the result, the dry bulk shipper has been a virtual penny stock for much of the last few years. The good people at Nasdaq don’t take kindly to that sort of behavior, so to keep its listing (and save face), DRYS executed a reverse stock split — and then two more. DryShips executed a 1-for-25 reverse split in March, a 1-for-4 spilt in August and another 1-for-15 spilt to start November.
That brought DryShips’ share count down from nearly 27 million to just over 1 million.
Then there’s DRYS debt holders. During the commodity boom, DryShips and many other commodity-focused firms took out debt to expand. But that became the undoing of a number of firms. Bankruptcy rumors have swirled DryShips, and there’s plenty of validity to those reports. In mid-March, DryShips suspended principal and interest payments on three of its matured credit facilities to preserve liquidity. It has yet to make the final balloon payments on those bank credit facilities.
Instead, it’s looking to work with lenders to restructure the facilities and has pledged preferred stock in exchange for debts. Asset sales have also been planned to help reduce this burden.
Some DRYS stock holders have started to feel hopeful that the company won’t end up in bankruptcy court, thanks to these efforts.
A Donald Trump Bump for DRYS Stock
The last bit of good news for DryShips comes courtesy of Donald Trump.
The Baltic Dry Index — the main measure of shipping rates — already had been creeping up. But Trump’s pledge to boost infrastructure spending is carrying dry bulk shippers to glory. The idea is that we’ll need plenty of commodities — steel, copper, aluminum — for this grand infrastructure plan.
Firms like DryShips and Eagle Bulk Shipping Inc (NASDAQ:EGLE) should get the nod to ship them.
The positive news from DryShips’ efforts to reduce debts, coupled with Trump’s surprise win, coupled with a much lower share count, has created one of the biggest short squeezes in history. In a matter of days, shorts trying to cover their negative bets (by buying back shares) has created a run that has send DRYS stock from roughly $5 to $100.
DryShips Doesn’t Have Much Left for You
DryShips’ 1,900% gain is crazy, and likely won’t be repeated. The situation has certainly moved on from “critical condition,” but the shipper is far from stable. At least not enough to warrant the kinds of gains we’ve seen in such a short time.
Those debts are still there. DRYS is working with lenders, but there’s no guarantee they’ll be OK with a settlement. Immediate bankruptcy may be off the table, but the company isn’t out of the woods.
And while the Trump trade might have boosted optimism, remember that no one has any clue how much The Donald will get for his infrastructure plan, plus much of it will be suppplied by American-made products. You’d best belief that domestically produced steel and other commodities are going to get the nod first. The benefits to shippers like DryShips could be muted.
Investors might see the gains in DRYS and think it’s the next big thing. It’s not. This is a feat of financial engineering, a little reversion and way too much hype.
If you bought DRYS stock near the bottom, pat yourself on the back and take your money while you can. If you’re not in yet, don’t bother. This story likely doesn’t have a happy ending.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.