DryShips Inc. (NASDAQ: DRYS) has been a primary topic of discussion among investors for some time now, and for good reason. The stock is up and down more than a roller coaster, and when it makes these moves, they are usually big. However, it may be easy for some to get sucked into what I call the DRYS game. With the perception that this stock may climb from $2 per share to $100 per share any time, it may be hard for some to stay away from it. However, the bottom line is that DRYS is a bad investment, at least in my opinion. Today, we'll talk about 3 reasons why...
Reason #1: DryShips & Kalani Investments
The first reason that it may be best to stay clear of DRYS has to do with a company known as Kalani Investments. Kalani is a company that's located in the British Virgin Islands. What they seem to do is purchase massive amounts of stock in foreign companies, only to offload their shares onto the public for a profit. This is what has been referred to time and time again as death spiral financing, and when you follow the paper trail, it's clear that in these types of transactions, those losing their paper are investors!
Well, DryShips and Kalani have a bit of a history at this point. In fact, Kalani has purchased around a half a billion dollars worth of DRYS over the past few months. Every time they make a large purchase, investors frenzy and the stock skyrockets. This is when Kalani likely dumps the stock onto the public for a profit, dragging the value of it down. Ultimately, this death-spiral financing relationship is a perfect reason to stay clear of DRYS.
Reason #2: George Economou Profits While Bleeding DRYS Dry
Unfortunately, the CEO at DryShips, George Economou, doesn't seem to be much better for the company than Kalani. While Economou has a responsibility to his investors, he seems to throw that responsibility out the window regularly. One of the clearest ways to see this is to look at the company's debt.
You see, a massive amount of debt owed by DRYS, around 90% of it, is owed to George Economou. Now, I have no problem with a CEO giving loans to his own company. In fact, that's usually a good thing. However, in this particular case, the problem is how these loans are structured. At the end of the day, Economou charges his own company massive interest rates, higher rates than investors should be willing to pay. All the while, the debt is structured so that DRYS investors all the risk in the loans, not Economou himself. That's a major issue. Ultimately when the CEO of a company profits at the detriment of investors, well, that's bad news my friends.
Reason #3: The Reverse Split Runaround
In an attempt to make sure that DryShips continues to look like a decent investment, we've seen reverse split after reverse split. These aesthetic changes the the stock are great for looks, but they hide a big issue, and that's the massive declines the stock has experienced. Ultimately, reverse splits seen at DRYS are a sign that the death-spiral financing is doing what it does best, killing the value of investor assets when they invest in the company.
The Bottom Line
While I would love to say that I can get behind DRYS, that would be like saying I could get behind Enron. At the end of the day, looking into the details shows that DryShips is nothing more than a personal ATM for the CEO of the company, George Economou, and that it's a source of massive losses for just about anyone else involved, with the exception of Kalani Investments of course.
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[Image Courtesy of Wikipedia]