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XMFSinchiruna (27.82)

The Greatest Gamble in Stocks

Recs

21

January 06, 2011 – Comments (9) | RELATED TICKERS: DRYS

It's certainly not an investment for suitable for retirement or college funds, but for a small wager that one is completely willing to place at risk, the potential payoff on this one is pretty incredible. [Be sure to vote in the Motley Poll at the bottom of the article, and thanks for your rec if you like the content]

http://www.fool.com/investing/general/2011/01/06/the-greatest-gamble-in-stocks.aspx

DryShips (Nasdaq: DRYS) -- that enigmatic, much-transformed shipper with a vehemently loyal following -- provides the ideal example of a stock pick where perhaps both risk and potential reward approach the limits of the imagination. I have long considered this one of the scariest stocks from any sector, but lost between the lines is my corresponding acknowledgement of the potential reward.

Pondering the payday
Now that we've contemplated the ways one can lose with a bet on DryShips, it's time to consider the potential gains from a successful outcome for Economou's unabashed quest for countercyclical growth. After all, it was not long after I warned investors of the debt-driven dangers of Teck Resources (NYSE: TCK) that the stock catapulted straight through nine-bagger status to stand today at a 24-fold gain from its multiyear low. We wouldn't call it gambling if the potential gains were not substantial.

In a jackpot scenario where DryShips manages to build a backlog of contracts on these first four drillships, which could in turn funnel capital into the exercising of options on the additional vessels, a forward-looking Fool can begin to see just how massively undervalued this 78%-owned Ocean Rig venture may arguably be. If such conditions were to be accompanied over time by improving market conditions in both the dry bulk and oil tanker segments, one could conceivably see these embattled shares shooting for the moon. Since DryShips has already diluted its share count a gut-wrenching 11-fold during its first five years as a publicly traded company, one might tentatively surmise that the worst of that activity must certainly lie in the past.

In parting, I would remind Fools of the principal advantage inherent in a truly high-stakes bet: Even a modest wager that one is prepared to lose outright can conceivably deliver that delightful surprise with a legendary multibagger return. I will continue to rely upon far safer resource plays like Peabody Energy (NYSE: BTU) and BHP Billiton (NYSE: BHP) to form the conservative core of my commodity-related exposure, but risk-ready Fools seeking a high-octane vehicle for overlooked growth potential may wish to give DryShips' roulette wheel a spin.

 

9 Comments – Post Your Own

#1) On January 06, 2011 at 1:58 PM, Valyooo (99.46) wrote:

I don't know much about the sector (I wish I did) but I believe what you say...except the dilution part.  I bet after the first 5 fold dilutions people probably thought it was all in the past, but diluters always dilute, which is irresponsible IMO...I wouldn't touch a company that loves to dilute.

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#2) On January 06, 2011 at 2:05 PM, XMFSinchiruna (27.82) wrote:

Valyooo

That's just one of many reasons why DRYS is not an attractive investment, and why you'll find scores of my past articles blasting the stock and the company's CEO. This is the kind of play I would only consider with pocket change ... truly an allocation so small you really don't care at all if it fails. If it surprises us and rises 24-fold as TCK did, though, that pocket change can turn into bills lickety split. That was the thrust of the point I tried to make.

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#3) On January 06, 2011 at 4:28 PM, rfaramir (29.36) wrote:

I'm with Valyoo. I don't trust management. Not only is he a diluter, he has deals between various companies he owns that are too arcane to trust. DRYS seems to take the fall but Economou seems to always come out fine. I don't think his interests are really aligned with the company's or the shareholders.

You're right on the theory with risk, rewards, and gambling, but I don't think Dryships is the one to gamble on.

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#4) On January 06, 2011 at 4:35 PM, Valyooo (99.46) wrote:

I agree.  I would rather gamble on something like CMZPF or BDGR or a penny miner.  I do appreciate the blog though.

Rfaramir if economou always  comes out fine, why not buy it?

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#5) On January 06, 2011 at 7:22 PM, silverminer (31.29) wrote:

We're all saying essentially the same thing. The issues you both cite are the reasons not to treat DRYS as a viable investment. However, even with further dillution and debt distress, DRYS shares could conceivably come out screaming if the Ocean Rig gamble pays off. Remember, China has treated DRYS as a welcome partner with its $5 billion investment fund in Greek maritime ventures. That's a big cushion against the impact of the issues you guys are rightly focusing on. I hope you're hearing what I mean by a small bet ... in my case I may take a bet on the shares that's = 0.1% of my portfolio. If I lose it, I won't feel the pain. If it multiplies 24X, I'll feel the gain. :)

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#6) On January 07, 2011 at 3:05 AM, Valyooo (99.46) wrote:

Haha I totally understand what you mean.  Like, .05% of your portfolio (if you have a decent sized portfolio).  if you lose it you wouldnt notice if it pays off it is nice. Kinda like long term options on a crap company

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#7) On January 07, 2011 at 3:17 PM, rfaramir (29.36) wrote:

Valyooo: "Rfaramir if economou always comes out fine, why not buy it?"

That sounds like you'd like the stock of any company whose CEO gets a big bonus or golden parachute despite failing the company!

He comes out fine due to owning the other companies that DRYS contracts with. I don't remember the details but it was LIKE this (don't quote me): DRYS contracts with another company of his, overpaying, DRYS and its shareholders lose, Economou, through owning the other company, wins. You don't buy DRYS as a result of Economou 'winning' in this case.

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#8) On January 09, 2011 at 5:44 PM, Valyooo (99.46) wrote:

Sorry, I mistyped that...I meant why not buy the holdings that win through DRYS losing?

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#9) On January 13, 2011 at 11:16 PM, Pennyperson (< 20) wrote:

Hmm...to heck with DRYS...push in on GMR = better short term results.

I know I'm going to get blasted=go ahead

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