You Know It’s a Real Rally when DryShips Takes Part

In the past year, there were few worse places for investors to hide than in a company with both exposure to global shipping and a domicile in Greece.  Yesterday, shares of DryShips (NASDAQ: DRYS) ignored those two realities and surged $0.34 or 8.23% following a Morgan Stanley upgrade.  In early 2007, as the emerging market growth story gained steam and the global economy seemingly soared, this sector was one of the most popular with investors.  In each of its attempts to rally post-2008 meltdown, DryShips has been subsequently beaten down to new lows.  Whether this sector can sustain its latest upside push will be a great indicator to investors as to the vitality of global trade markets.

From its lows in 2006 to highs in 2007, DryShips rallied over 1500%.  From its highs in 2007 to lows this July, the company shed more than 97% of its market-cap.  Now that’s volatility!  When DryShips was a Wall Street darling in 2007, the company took on massive amounts of debt that resulted in yet more massive equity dilutions during the financial crisis as earnings slumped and the freeze-up in debt markets made the roll-over of debt nearly impossible.  Images of the infamous “Ghost Fleet” sitting idle in the Pacific continue to haunt investors who wagered big on the decoupling story as the Great Recession took hold in the developed countries of the world.

To make matters worse, in 2008 as oil prices surged, the company began offering offshore drilling services to energy exploration companies.  Talk about buying the top of a market!  Additionally, with the regulatory uncertainty in the US following the Gulf Oil Spill, DryShips now has exposure to a new risk unique to its sector peers.  However, just this morning, DryShips received its second round of good news in as many days, when the company won a $135 million contract for deepwater drilling off the west coast of Africa.

This is a timely upgrade from Morgan Stanley considering the performance of emerging and frontier markets during the last quarter; however, something about the move yesterday seems a little odd to me.  On each of the sector’s rally attempts post March 2009 bottom, the upmove has been an indicator of a waning market rally.  The shippers constantly spins its wheels in place while the market rallies and only gets going near short-term tops.  On its two latest rally attempts, the shippers have been a great contrary indicator to start looking for a broader market pull-in.

Dryships rallies correspond with short-term market tops.

That being said, this recent move does not necessarily spell the end of the market’s robust September rally.  Things have started to turn around for the shippers, with global markets looking far healthier and balance sheets restored to more palatable debt-to-equity ratios.   DryShips finally has a fairly modest P/E again and good certainty of revenues with their locked-in shipping contracts.  I’ll be watching this sector closely to see if they can actually gain some investor interest.  If they do, that will be a great tell that this latest market move is more than a rally and the start of a new leg higher.

Disclosure: No relevant position.