Trying to catch dry bulk shipper DryShips Inc. (NASDAQ:DRYS) has been like trying to catch a greased pig — only a lot more profitable for the fortunate. DRYS stock has put together gains of about 260% in just the small bit of time since Election Day.
But a few things have happened in between here and there.
At its best, DryShips stock returned nearly 1,900%. However, yesterday, shares dropped some 75%, crushing anyone who tried to chase the stock in its breakneck run higher.
Listen, we said DRYS would burn you.
Such is the nature of irrational, overnight exuberance.
What the Heck Is Going On?
Part of the thanks should go to President-elect Donald Trump, if you managed to get in and out at the right points.
Prior to Trump’s victory, DRYS stock was teetering on the edge of bankruptcy, selling assets and undergoing reverse stock splits and all sorts of financial engineering shenanigans to stay afloat. Then, as JPMorgan analyst Noah Parquette noted, “The dry bulk shipping sector (went) bananas since Trump was elected,” as traders were emboldened by improvements in shipping rates and DryShips’ limited amount of shares.
The intense run-up prompted the Nasdaq to halt DRYS stock for the entirety of Wednesday’s session, seeking more information for the sudden gains. Then, on Thursday, DryShips decided to leverage its recent fortune, announcing it had entered into a deal to sell convertible preferred stock in the neighborhood of $20 million to Kalani Investments Ltd. Kalani has the right to convert its preferred shares into common stock of DRYS at $30 per share.
That deal could see DryShips receive as much as $80 million if all warrants are exercised, and could give Kalani control of about 76% to 98% of the company. The proceeds, according to DRYS, will go to paying down its debt and to “general corporate purposes.”
Investors obviously disapproved of the dilution and below-value cash raise. So when trading resumed on Thursday, they sold DryShips stock off en masse.
Buy that wasn’t the end.
Today, DRYS opened at $12.64 on more than five times its usual volume, and as of this writing, it was up another 50%. According to DryShips, it wasn’t “aware of any other news” that would’ve caused such an increase in trading. Interestingly, Eagle Bulk Shipping Inc (NASDAQ:EGLE), which has followed DRYS for much of its crazy ride, is down another 5%.
But here’s where things get convoluted and interesting all at the same time.
If DRYS stock falls below $30 per share (which it has), then Kalani can convert its preferred stock into common shares worth 77.5% of the lowest daily average price over the past two weeks, for no less than $1.50 per share.
In short, shareholders could be in for a massive dilution effect sooner than later.
It’s fair warning, and it bears repeating what we said earlier this week: “The massive rise in DRYS stock has only created a death trap for all but the quickest traders.”
Get out with what you’ve got while you still can.
As of this writing, John Kilhefner did not hold a position in any of the aforementioned securities.