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Hidden assets make this company in a hated sector a Buy

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June 17, 2011 – Comments (3) | RELATED TICKERS: DRYS

Let me begin by saying that I absolutely hate the shipping sector.  For some reason, the shipping industry seems to be nothing more than the capital-destroying airline industry, just with dividends.  I'm sure that one can make a lot of money timing a purchase in a shipper right, but eventually the companies in the sector never seem to be able to control themselves and they build to overcapacity.

Anyhow, having said that, I am going to write something bullish about a shipper, DryShips (DRYS).  Why have I made DRYS an exception to my "no shippers" rule?  Because the company has hidden assets, specifically Ocean Rig an UltraDeep Water driller.  In a world where easy to reach oil reserves are becoming harder and harder to find, this is the hottest sector of the drilling industry.

Ocean Rig currently trades OTC in Norway.  According to a recent research note by Sterne, Agee & Leach Ocean Rig's market cap implies a value of $5.32 per DRYS share.  With a current share price of $3.93, this means that Mr. Market is assigning a valuation of negative $1.39 to DryShip's dry bulk and tanker fleet.

DryShips is holding a meeting with analysts next riday to announce what it plans to do with its drilling subsidiary.  The catalyst that will unlock this hidden value is DRYS' plans to list shares of Ocean Rig in the U.S. later this year.  When that happens, the market will realize that DRYS is undervalued.

Source: Don't Dock DryShips

http://online.barrons.com/article/SB50001424053111904472004576391620974522798.html?mod=BOL_hpp_oe

Deej

3 Comments – Post Your Own

#1) On June 19, 2011 at 12:52 PM, TSIF (99.96) wrote:

I will preamble this with a comment that I haven't looked too closely in DRYS in at least a year and I value your fresh insight.  I also agree the shipping industry is over built, but have kept my fingers in it, most notably with NM which I held long for for over two years. They are clearly range bound and floating with the industry. Their borrowing is up and I'm watching them closely, but at least their dividend is paid from cash flow.

I do agree that most shipper paying divdends do so recklessly. Even in the "good times' the dividends were paid while the company was issuing stock and borrowing money. In essence they were paying dividends with the holders own money.

Overall, however, I did research DRYS LONG and HARD about two years ago. IN their presentations they cited the spinoff of the  Drill Rigs two years ago as being worth at LEAST $30. 

With the Barron's article and others, they may get a bump over the short run, but DRYS has shown a consistant history of a management that is NOT stockholder friendly. Their CEO in particular has done multiple things that worked out well for him, but poorly for stockholders.

I know you like like special situations and I've played a few of them and enjoyed learning from others. IN the case of DRYS I for one will not go there.  I would recommend that those who do keep a close eye on everything and be ready to bail if more dilutive financing is the result of any positive stock play.  In some cases, as attractive as things may be, if you can't trust management, while you might miss a short term pop, staying away can result in better sleep at night!

Thanks for the info, and again, much appreciated and respected, even if I disagree.  In all likelihood, the name of Dryships alone has me negatively biased.

TSIF  

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#2) On June 19, 2011 at 7:45 PM, TMFDeej (99.32) wrote:

Thanks for the candid feedback on DRYS, TISF.  I haven't put any real money into this one.  It's only a CAPS play at this point.  I'll remember your opinion on management and probably pass on taking a real position here.  I did establish a new real-life position in a different company late last week.  It's a really cool situation that I hope to write about soon.

Deej 

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#3) On June 19, 2011 at 8:41 PM, TSIF (99.96) wrote:

Thanks Deej.  I find in the short run that people should short my opinion!  This one could certainly go either way, but investors should always be very careful with any special situations and consider them higher risk/reward, evaluating them and watching them much closer than usual "long term" type equities.

Good luck with your "other" RL call.  I look forward to reading about it!!!

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