Why DryShips Stock Dropped Another 18% Today

By Rich Smith Markets Fool.com


IMAGE SOURCE: Prestige Brands Holdings.

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What happened

Dry bulk shipper DryShips (NASDAQ: DRYS) is tumbling once again, down as much as 18% in early Tuesday trading. As of 11:45 a.m. EST, the shares are changing hands for $4.61 apiece -- another 14.7% decline.

So what

As we explained last week, DryShips' board had earlier approved a 1-for-8 reverse stock split that would convert eight existing DryShips shares to one. That reverse split took effect Monday, with the new, post-split shares valued at about $8 each -- then quickly declining 33% to $5.40.

Today, the shares are falling once again as investors awaken to the possibility that a higher stock price might not be great news for DryShips, at least not when it came about via a reverse stock split.

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Now what

Expect more volatility to both the downside, and the upside, in the days and weeks to come. DryShips management says that the company's shares outstanding have declined to just 8.7 million shares as a result of the reverse split. With so few shares available for trading and so many of those sold short, the potential for wild swings in price will only increase.

This potential is likely to attract the interest of momentum and day traders, who will try to earn quick profits as DryShips' price swings dramatically, exacerbating the price movements. If you're any kind of a long-term investor, this is likely to make you seasick, and you're best advised to stay away from DryShips stock.

My advice: Maybe buy a few shares of Prestige Brands Holdings (NYSE: PBH), maker of Dramamine, instead?

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Rich Smith has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.