Image source: Getty Images.
Continue Reading Below
Shares of DryShips (NASDAQ: DRYS) plunged on Friday morning and were down 21% at 11:15 a.m. EST. This decline was the continuation of the stock's recent dive, with it down more than 70% over the past five trading days. The only recent news is the completion of another stock split, which seemed to give sellers another reason to abandon ship.
Dryships' stock has done nothing but sink this year. Driving that downdraft was the closing of the company's new $200 million credit facility with its founder to shore up its finances and the subsequent decision to immediately put that liquidity to work on another buying binge. Suffice it to say, investors loathe the company's decision to use virtually all its new-found liquidity to diversify.
That said, the decision does have some merit given that the vessels it intends to acquire are all under long-term time charters with creditworthy customers, which should lock in a steady stream of cash flow. That certainly has been the case for shippers with similar business models like Teekay LNG Partners (NYSE: TGP) and GasLog (NYSE: GLOG):
Contrast that with DryShips, which has experienced tremendous volatility in revenue and cash flow over the past year. Driving the decline is that DryShips leases the bulk of its vessels at short-term spot market prices, which fluctuate greatly due to market conditions. Meanwhile, most of the vessels owned by Teekay LNG Partners and GasLog are under long-term contract, which secures their revenue and cash flow.
Investors have serious doubts about DryShips' diversification strategy because it will use up nearly all the company's precious liquidity. The concern is that it will cause the company to run out of cash before its new ships start generating cash flow. It is a valid fear given that the Baltic Dry Index, which is a proxy for dry bulk shipping rates, has plunged since the beginning of 2017.
10 stocks we like better than DryShips When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*
David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now... and DryShips wasn't one of them! That's right -- they think these 10 stocks are even better buys.
Click here to learn about these picks!
*Stock Advisor returns as of January 4, 2017