Heres Why Shipping Stocks, Including DryShips Inc., Are Going Nuts Today
What happened
Two of the leading dry bulk shippers are heading in the opposite direction today because of unrelated news items, and the moves seem to be sending waves throughout the shipping industry. On the positive end, Star Bulk Carriers (NASDAQ: SBLK) was the recipient of an analyst upgrade, which sent its stock up 15% by 11:00 a.m. EST. That rising tide lifted other boat companies, including Golden Ocean Group (NASDAQ: GOGL) and Scorpio Bulkers (NYSE: SALT), which were both up double digits in morning trade. Meanwhile, DryShips (NASDAQ: DRYS) is heading in the opposite direction, plunging more than 25% by 11:00 a.m. EST after announcing new vessel acquisitions.
So what
Star Bulk Carriers rode the wave of an upgrade by Deutsche Bank, which raised it from a hold to a buy, citing increased confidence in the dry bulk market recovery. The bank ratcheted up its price target from $3.50 to $12 while noting that its "blue sky" valuation was upwards of $22 per share. That bullish note lifted other dry bulk carriers, including Golden Ocean Group and Scorpio Bulkers, which would also benefit from a recovery in the dry bulk market.
Image source: Getty Images.
That said, one notable dry bulk shipper did not participate in today's rally: DryShips. That's because the company has been on a mission to diversify away from the volatile dry bulk market, and it announced another step in that direction today after it decided to reenter the tanker market and acquire two oil tankers for $102.5 million. While the company bought the ships at historically low prices, it also said it expects to employ both on the spot market, which can also be very volatile. That's clear from the following chart of oil tanker company Nordic American Tankers (NYSE: NAT):
NAT Cash from Operations (Quarterly) data by YCharts.
As that chart shows, Nordic American Tankers' cash flow has ebbed and flowed quite a bit because of changes in spot prices for its oil tanker fleet, including dipping into the red in recent years. That's volatility DryShips can't afford right now, and it was something it seemed to be shying away from after recently announcing a deal to acquire up to four gas carriers under long-term time charters. However, it appears the company is throwing caution to the wind and jumping right back into another volatile market just because it can buy these vessels at bargain-basement prices. It's also worth pointing out that the company exited this market in 2015 after it got in over its head in debt thanks to a prior acquisition binge, which is an action investors clearly fear the company is in danger of repeating.
Now what
Optimism is starting to return to the shipping market, which has been under pressure thanks to low shipping rates. As such, more improvement could continue to lift these shipping stocks. However, the market has a history of volatility, which nearly sank DryShips last year. That volatility could return at any moment, which is why investors must have an iron stomach to invest in the sector and be fully prepared to lose the bulk of their investment should it run aground again.
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Matt DiLallo 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.