Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?
One thing’s for sure: You’ll never discover truly great investments unless you actively look for them. Let’s discuss the ideal qualities of a perfect stock and then decide whether DryShips Inc. (NASDAQ:DRYS) fits the bill.
The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:
- Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it’s certainly a better sign than a stagnant top line.
- Margins. Higher sales mean nothing if a company can’t produce profits from them. Strong margins ensure that company can turn revenue into profit.
- Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management’s attention. Companies with strong balance sheets don’t have to worry about the distraction of debt.
- Moneymaking opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
- Valuation. You can’t afford to pay too much for even the best companies. By using normalized figures, you can see how a stock’s simple earnings multiple fits into a longer-term context.
- Dividends. For tangible proof of profits, a check to shareholders every three months can’t be beat. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.
With those factors in mind, let’s take a closer look at DryShips.
| Factor | What We Want to See | Actual | Pass or Fail? |
|---|---|---|---|
| Growth | 5-year annual revenue growth > 15% | 24% | Pass |
| 1-year revenue growth > 12% | 30.1% | Pass | |
| Margins | Gross margin > 35% | 52.4% | Pass |
| Net margin > 15% | (9.9%) | Fail | |
| Balance sheet | Debt to equity < 50% | 115.2% | Fail |
| Current ratio > 1.3 | 1.27 | Fail | |
| Opportunities | Return on equity > 15% | (3.3%) | Fail |
| Valuation | Normalized P/E < 20 | NM | NM |
| Dividends | Current yield > 2% | 0% | Fail |
| 5-year dividend growth > 10% | 0% | Fail | |
| Total score | 3 out of 9 |
Source: S&P Capital IQ. NM = not meaningful because of negative earnings. Total score = number of passes.
Since we looked at DryShips last year, the company has given back the point it gained from 2011 to 2012, as it went from a modest profit to a loss this year. The stock has lost a further 40% over the past year, adding to the multiyear woes that have struck the entire industry.
Shipping companies have had to deal with plunging prices for dry-bulk vessels, as the Baltic Dry Index has fallen more than 90% from its 2008 highs, with a glut in capacity resulting from ambitious shipbuilding projects that ran into the global recession and financial crisis. Now, conditions are so bad that DryShips actually paid more than $21 million to get rid of two Suezmax tankers that were under construction.
Still, 2013 has led to a small rebound. As Fool contributor Alex Dumortier noted earlier this year, the cyclical nature of the business points to some compelling values in the space. Diana Shipping Inc. (NYSE:DSX), for instance, trades at less than five times its cyclically adjusted earnings, while DryShips’ share price is below annual earnings adjusted over the cycle. Stocks throughout the space have finally started responding to that value proposition, as Navios Maritime Holdings Inc. (NYSE:NM) and Safe Bulkers, Inc. (NYSE:SB) have joined DryShips and Diana with substantial gains in the New Year.
But in an obvious sign of how bad things are for DryShips, the company increased its offering of ultra-deepwater driller subsidiary Ocean Rig UDW Inc (NASDAQ:ORIG) shares by 50%, hoping to raise $126 million to help keep its struggling shipping business afloat. Yet DryShips has a market cap that’s less than what its roughly 60% position in Ocean Rig is worth, assigning a negative value to DryShips’ core business.
For DryShips to improve, it needs a long-awaited global economic turnaround to boost the Baltic Dry Index and get its profits back up. Ocean Rig may help DryShips survive the tough times, but the life support it offers won’t last forever.
The article Has DryShips Become the Perfect Stock? originally appeared on Fool.com and is written by Dan Caplinger.
Fool contributor Dan Caplinger and The Motley Fool have no position in any of the stocks mentioned.
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