My Trade of the Week is long DryShips, Inc (DRYS) . Yes, you read that correctly. As anyone who has followed shipping stocks knows, DRYS and its CEO George Economou are infamous, not famous. Economou uses the publicly-traded entity as a repository for assets he privately owns, and, at times since its IPO in 2005, has used DRYS as a personal piggy bank with the help of the company's extremely accomodative independent Board members. DRYS stock volatility has been stoked by a series of reverse splits. Reverse splits are fairly common in the microcap space, but DRYS certainly has set the bar high by doing what amounted to a 1-for-11,600,000 reverse split in the period from June 2016 to July 2017. That is not a typo.
So, Economou was essentially draining all the equity from the former DryShips and creating a new entity as of this July. One of my brokerage accounts actually lists my DryShips shares as "DryShips New July 2017" -- and that is really how one must view this stock. I warned people to stay away from the old DRYS as the reverse splitting was happening--and wrote a column about this -- but that period in the brief history of DryShips has ended. It's a recent IPO.
As with most IPOs, the "new" DryShips hit the equity markets at a time when industry fundamentals have improved markedly. Simply put, the market for dry bulk ships is rockin'. The key indicator for dry freight shipping rates -- the Baltic Dry Index -- continues to establish new three-and-a-half year highs, and it looks like the long nightmare for shipping companies is ending. Shipping company managements' efforts to limit supply growth -- ceasing newbuild orders and opportunistically scrapping older bulkers -- have finally borne fruit and demand for the key dry bulk cargoes -- coal, iron ore, grains -- has been consistently strong.
At the height of the dry bulk depression in January 2016, I recommended Navios Maritime Holdings Preferred Series G (NM) as my Real Money Best Idea, and I am still atop the leaderboard with a gain in excess of 300% on that NM-G call. Timing is crucial when playing shipping stocks, and with DRYS, an investor has a chance to buy into a very attractive fleet at cut-rate prices.
Why is DryShips dry bulk fleet so attractive? Because almost all of it is trading in the spot markets. Dryships older bulkers -- 12 Panamax, 5 Kamsarmax and 4 Newcastlemax -- are money-printing machines in a period of rising rates. The three main dry shipping categories have seen dramatic increases in day rates this year -- Capesize rates are today quoted at $22,052/day versus $10,023/day a year ago, for instance -- and with ships in the spot market, those revenue gains will drop directly to the DRYS bottom line.
Also, Dryships is in the midst of a program to expand its fleet into the Very Large Gas Carrier segment. These ships carry LPG (mostly propane) to markets in the Far East (India and China) from major oil products exporters in Qatar, Saudi Arabia and, increasingly, in the U.S. Unlike LNG, LPG does not have to be frozen to be transported, so processing LPG does not require the expensive cryogenic facilities needed for LNG. Thus LPG is a great source of heating and cooking fuel for emerging markets.
So, Dryships' current market cap of $300 million undervalues its total fleet by more than half by my calculations. It stands to reason that ships are worth more in the second-hand market when rates are rising, and that is exactly the situation we are in now.
Economou invested $100 million of his own capital in a DRYS rights offering that closed two weeks ago -- and now controls 69.5% of the shares. An entity controlled by Economou also holds all of DRYS debt -- a very reasonable amount of $73 million based on the vessels' value -- and thus it is in his best interest for this new entity to succeed.
Economou is notorious for selling assets to unsuspecting investors at inflated values, but in the case of the new DRYS, he is actually investing fresh capital in the business. I will only buy DRYS when George is buying, and if he were selling -- he agreed to a six-month lockup until April 2018 on the shares he acquired in the rights offering -- I would run for the exits.
This is a "hold your nose" play. DryShips is always going to have legacy corporate governance issues -- the company is currently in receipt of a subpoena from the SEC relating to capital raises down between June 2016 and July 2017. I am not suggesting Economou has turned into Jack Welch overnight. But he has put together a very attractive set of assets, and the market is not valuing it as highly as it values peer companies such as Navios or Scorpio Bulkers (SALT) .
A rising tide lifts all boats. In cyclical industries, real investment returns are generated by buying the riskier companies during periods of rising prices, not the safer ones. DryShips' governance issues make it a very risky stock, indeed, but at this point, I believe the industry fundamentals make the rewards outweigh the risks, and that DRYS is a very attractive trading name at current levels.
