Several Things To Consider Amid DryShips' Massive 800% 4-Day Rally

DryShips Inc. DRYS stock has soared in the past three sessions after breaking out of a $3.94–$5.85 trading range in which it was locked in since mid-October.

Since November 10, the stock has gained roughly 740 percent on volumes that is notably above average. What more, the rally seems to have further legs to play out. In the pre-market Tuesday, the stock was up yet again.

A look at what is driving the stock higher has thrown up some interesting angles.

Surging Baltic Dry Index

The Baltic Dry Index or BDI, an indicator compiled by the Baltic Exchange based in London and indicating the price of moving the major raw materials by sea, has gone up nicely in recent sessions. The index climbed above the psychological barrier of 1,000 for the first time since August 20, 2015, last Friday. After a 20-point advance on Monday, it is now at a 15-month high.

Reverse Stock Split-Offering Psychological Boost

The company also effected a 1-for-15 reverse stock split on November 1, which served to reduce its outstanding shares to a meager 1.1 million. This is in follow up of a 1-for-4 stock split effected in August, which redeemed the stock price back above the $1 level.

A reverse stock split offers at least a psychological boost to stock price, although fundamentals don't change with the split. It is one strategy adopted by firms to keep their stock prices from sinking abysmally.

Another angle of looking at the stellar run-up is from the perspective of a short squeeze, as a notable volume of shares have been sold short.

Q3: Nothing To Write Home About

Dryships recently reported its third-quarter financial results, with adjusted EBITDA at (-$7.875) million, wider than (-$1.57) million in the year-ago period. Revenues fell steeply to $12.09 million from the year-ago's $50.77 million.

Unmanageable Debt Obligations

The company is in the process of selling its fleet in order to meet its debt obligations. In the November 9 earnings release, the company said it is in discussions with lenders for restructuring its bank facilities. While deferring the final balloon installment on three of its bank facilities that have matured, the company said it has elected to suspend principal and interest payments on the remaining bank facilities to preserve cash liquidity.

The slowdown in China, the hot and happening economy, is wreaking havoc on dry bulkers; they are left with huge fleets acquired without concomitant increase in demand.

Fundamentally, things have not changed much for the company. The strong upward move is probably reflective of some factors we discussed that do not seem to have bearing on the long term prospects of the company. As such, the stock looks an ideal foil for investors who seek to cash in on the short-term volatility.

In pre-market trading Tuesday, the stock was up an incremental 26.11 percent at $54.05, and at last check, the stock was up 47.81 percent at $63.36 in the first 30 minutes of regular trading.