Greek shipping company and Small-Cap Star DryShips, Inc. (DRYS) were on the rise again Tuesday, with shares jumping nearly 6 percent on heavy volume. Shares were opened at $3.80 a share after closing at $3.68 on Monday and climbed as high as $3.95 before pulling back around midday.
DryShips peaked at $4.70 a share on the last day of 2013 before retreating to just $3.16 a share over the first month of the year. However, since Feb. 5, the stock has bounced back, gaining over 17 percent.
Baltic Dry Index Gives Insight
DryShips has shown some volatility, peaking sharply twice in late September and then again, higher, at the end of December, but the stock has also developed a strong, steadily-rising support level in June last year. This support level started at about $1.75 a share and has risen to just over $3.50 a share, helping push DryShips past its 50-day SMA, a level that appeared to have capped gains earlier this month.
However, the story becomes much clearer when you compare DayShips’ stock chart to the performance of the Baltic Dry Index, a key indicator of the cost of shipping. The Baltic Dry Index can be extremely volatile as the time necessary to build new ships of the size used in international shipping can be years. With supply being extremely inflexible, relatively minor fluctuations in demand can lead to major shifts in the price of shipping.
And the last year has not disappointed in this regard. The Baltic Dry Index climbed from just over 825 in early March all the way to 2,145 in early October, surrendered much of that as it fell back to 1,485 by late November, then rallied to a new 52-week high of 2,330 on Dec.12 before finally falling back to about 1,100 by Feb. 6.
Higher shipping costs generally benefit shipping companies, so it should come as no surprise that DryShips’ stock performance mimics that of the Baltic Dry Index, with the stock’s two peaks coming in unison with those of the index. However, going back to the summer of 2012, it appears as though the Baltic Dry Index may have bottomed out, showing gains since that point despite volatility.
The perception that the Baltic Dry found bottom and will continue to rise on average could be a contributing factor to the support level that’s formed for DryShips. If investors feel confident that this major index isn’t going to plunge to new lows, it could seriously buoy confidence in shipping stocks like DryShips.
Fundamentals Could Show Strength
Looking away from the key factor of shipping costs, which ultimately drives gains or losses for the entire industry, DryShips also appears to show real strength as an individual company. Revenue has steadily increased over the last four year, from $860 million in 2010, to $1.1 billion in 2011, to $1.2 billion in 2012, to $1.5 billion last year. What’s more, while the company’s P/E ratio may raise some real red flags, it’s P/S of 1.07 and P/B of just 0.61 appear to show a company that has a relatively sound infrastructure and brisk sales backing its gains.
The company’s negative net income is a cause for concern, and it appears to be carrying significantly more debt than would be ideal, but the company fits the Small-Cap Stars Methodology well, with strong number in enterprise value, cash, net margin, and book debt to capital ratio. While shipping prices continue to be a key factor, and there's no guarantee of future performance, DryShips does show the potential to continue making gains.