Dryships, Inc. (DRYS) Mania for Retail Investors

Dryships stock (NASDAQ:DRYS) first came to my attention back in November. On the morning of November 14th, we saw on Twitter how the stock went from $13 to $43. Naturally, this type of price movement piqued our interest. It appears to be a delayed reaction to the presidential election from retail investors. Therefore, we decided to go through the company’s financial statements to learn more about Dryships stock.

Dryships’ Business Profile

We start by looking at the general investment profile of the company. For this company, leverage is the name of the game. The majority of these highly-leveraged companies have profits (or losses) that move exponentially. We see this a lot with companies tied to commodities, like gold and oil. It also occurs in companies that have massive fixed overhead in more cyclical industries. Transportation (in this case shipping) falls into this category.

2016-12-24In short, this company went from investment grade to junk in a little over a year. Multiple reverse stock splits failed to improve price stability. It appears as though there is no end in sight. On any given day (like today for example), the stock can drop over 5%.

The most interesting thing about Dryships stock is it rose from $5.10 on November 9th, 2016, to $73 by November 15th, 2016. At the time of writing, Dryships stock sits at $4.03 per share. I am sure a large part of this price movement was due to short sellers getting squeezed out of their positions after the stock started to gain momentum. However, the beginning of the price movement was undoubtedly caused by retail investors believing there was a shift in the underlying business economics.

Dryships SEC Filings

In the company’s filings were some of the most confusing financial engineering. From the beginning of November to now, Dryships filed 18 times with the SEC. The majority of these are 6-K filings: reports of foreign ownership. The company reported both issuance and acquisition of various convertible preferred shares, warrants, etc. The company is retiring certain outstanding debt agreements and reissuing new financial contracts to raise capital to fund its operations. It seems the majority of these convertible preferreds and warrants are dilutive. Dilution, of course, results in a near-term drop in the stock price.

Qualitative Analysis of Dryships

On the positive side, the company’s founder showed to shareholders that he has no problem becoming the lender of last resort. For most distressed companies, long-term shareholders feel much better when the company’s founder and Chief Executive Officer takes direct action to save the company from bankruptcy. Most billionaires (see the Wikipedia page on Mr. Economou) move on to their next venture after the stock market pummels their company out of 99% of its value. At least he appears to be trying.

On the negative side, certain contingency agreements within the newly issued contracts hint at possible wind-fall profits for Mr. Economou for his help. As the following screenshot from one of the November 6-K’s shows, these contractual agreements are certainly more complicated than the typical re-issuance of common stock.

Financial Engineering Concerns for Shareholders

To be totally honest, I had to reread the prospectuses a few times to understand what all is going on. I was excited to see that Dryships tried to capitalize on its tremendous, albeit short-lived, rise in stock price. On November 17th, 2016, the company issued Series E-1 and Series E-2 convertible preferred shares along with warrants to raise capital. While these preferreds were issued at a discount to Kalani Investments Ltd. when Dryships stock was at $73/share, that discount effectively turned into a premium since the stock then dropped back down to the $4-5 level. The negative impact of these dilutive securities is softened since the capital was raised at an inflated stock price.

Another issue to note is that Mr. Economou treats Dryships like a private company instead of a public company. He was accused of self-dealing. Also, he made statements suggesting he is indifferent, if not passive-aggressive, to Dryships Inc. shareholders. Check out this Forbes Article on Mr. Economou.


Conclusion of Dryships Stock Analysis

All in all, this company is a trading sardine (read Seth Klarman’s Trading Sardine Story). If you trade this stock, you are betting on the actions of other investors. There is no safety net, this stock could possibly go to $0/share. However, it would be just as foolish to short Dryships stock. There is no options chain, and so you would have to actually short-sell the stock to have a bearish position. With a massive short percent of share float, any uptrend in this stock would likely cause a short squeeze.

Dryships stock is effectively a call option. Without any material improvements in the business, this stock is likely to keep moving lower. Of course, if it reverses (like it did mid-November), some serious profits could be made. But be careful not to fall for the hot-hand fallacy. Just because something spectacular happened recently does not mean there is a higher probability of it happening in the future.

There are better places your money could be put to use. At the end of the day, Dryships stock is a lottery ticket. A few hundred shares could be a fun gamble for someone with plenty of money, but in my opinion it would be foolish for most retail investors to buy this company. Therefore, we are neither adding Dryships stock to our Bullish List or our Bearish List. There are much better and easier stocks to trade and invest in this market.

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