DRYS: The Long Perfect Storm

All the conditions are setting up for a perfect storm:



1) China's iron ore safety stock was estimated to be about 48 mil MT in December (sufficient for about 1.5 months supply) that is quickly being depleted.



China urgently needs to start importing large quantities iron ore, which will increase both the BDI and subsequently, DRYS' share price.



2) China is going through one of its coldest winter in decades causing severe shortages of coal with power outages in many regions.



The situation is so bad, coal exports were officially banned last week.



China will soon be ordering huge quantities of coal, which will increase the BDI and subsequently DRYS' share price.



3) Whether contrived or real, many ports used to export coal and iron ore are closed due to damages from typhoons, shipping accidents and repairs.



Some mines have also been closed due to flooding. Once these temporary situations are corrected, coal and iron ore shipments will start again, the BDI will rise along with DRYS share price.



4) The market wrongly assumes that an economic downturn in the U.S. will have devastating repercussions to China's economy and subsequently will lead to a decrease in coal and iron ore imports.



This is simply incorrect.



Any repercussions will be minor (estimates range from 0.5 to 1.0 off projected GDP growth of 11%). Once the market realizes that coal and iron ore imports are actually rising over 2007, the demand for dry ships will increase and DRYS' share price will rise.



5) Because of the timing, the market assumes that the fall of the BDI is attributed to falling demand in China.



This assumption is wrong.



Demand is actually higher; much higher. Demand is strong but supply has been interrupted, creating idle ships, a falling BDI and an attractive DRYS shares price.



Once the various supply problems are resolved, ore and coal shipments will resume, the BDI will increase as will DRYS' share price.



6)DRYS will soon be announcing 4Q results. Probably around 07 Feb.



The consensus estimate is $3.93. DRYS results have beat estimates 4 out of 4 times over the past 12 months.



They'll most likely do it again. If DRYS does beat estimates, DRYS share price will get a nice bump.



7) The world's supply of dry ships will greatly increase from the end of '09 and especially in '10.



George Economu (CEO of DRYS) knows this.



To address this issue, I suspect George will be announcing some diversification initiatives during the Q4 CC. (Possibly on Feb. 07).



The current market turmoil has created some interesting takeover opportunities and George is most likely evaluating some good options now.



We'll see.



8) DRYS share price will rise just based on valuation.



a- Forward PE is now about 3.

b- Total capitalization is less than enterprise value.

c- PEG is 0.1(?)

d-DRYS has the highest ROE in the sector.

e-DRYS has the highest profit margins in the sector

From any metric, DRYS is way undervalued and must rise based simply on fundamentals.

9) Technicals point to a trend reversal. A string of long empty candles off a strong support area of $48. Quite a few large block trades in recent sessions. The RSI bounced off 28 and is now close to 40, there was 9/26 bullish crossover on the MACD.

Although the past couple of days have shown some TA weakness any lower pricing from just under $60.00 will be a good buy. The next support area is around $53.92.




For the above reasons, I think DRYS share price will rise considerably from current levels. (Currently trading at around $59.00)



Watch the BDI and share volume from here.



Looking at the BDI chart, Capemax rates will probably recover before Panamax rates do.



When the Capemax numbers start going green, Panamax numbers will most likely follow shortly thereafter.



Be patient and good luck people.

Up from here.

DRYS is RISKY BUSINESS

I had a good laugh when I realized that the drama being played out on DRYS is very similar to the plot and characters in that old Tom Cruise movie, Risky Business.

If you've forgotten this classic movie, the story revolves around a high-school senior (Tom Cruise) that is left at home alone while his parents leave on vacation.

During his parent's absence, Tom Cruise manages to: wreck his dad's Porsche, fall in love with a hooker, gets laid, opens a whorehouse for school kids, makes a fortune, gets laid ( I like that one), has all the belongings stolen from his parents house, has a run-in with a pimp, loses all his money buying back the stolen furniture back from the pimp and fixing the Porsche, gets accepted into Stanford (by getting the Standford U. admission counsellor laid) and the parents arrive back from their trip with everything back to normal.

Allegorically, the cast of characters in DRYS' Risky Business are:

(Tom Cruise): Played by the new longs that are running around frantically trying to justify their long position while the world around them seems to be falling apart (BDI car crash, stolen shares that you have to buy back for a loss, international market meltdowns, port and mine closures, etc.)

The Parents: Old Longs and George Economou, who are enjoying life and are oblivious to chaos.

The Pimp: Nobu Su (who got thrown overboard 24 Jan--wonder why..) that was pimping his $1,000 whore boats for $5 BJs in the back alley to make good his short position on FFA derivitives.

The Johns: The Chinese who are in tough negotiations with their whores trying to get the cheapest rates, but will eventually have to pay through the nose to get screwed anyway, but will walk away with smiles on their faces.

The whores: Shipping companies, mining companies, port authorities, trading companies, etc., who will eventually screw the Chinese and make lots of money in the process.

We are in a Risky Business, but in the end, everyone gets what they want and walks away happy and satisfied; well most do anyway....

The moral of the story comes from that classic line from Risky Business that goes:

"Sometimes in your life, you just gotta say F' it. And if you can't say it, you can't do it."

Just say F' it, buy DRYS and give me some of that Old Rock 'n Roll:

http://www.youtube.com/watch?v=ilaUVGjMkJo

Load the boat on DRYS, ACH and RIG

This week was rollercoaster ride of opportunity.

The bottom fishers are out in force and are catching some huge bargains.

My ride on DRYS has been turbulent. My buy at $61 was stopped out, but I'm now back in with an average buying price of $51.31.

The fall earlier this week was an astounding opportunity. At one point, the Dow hit May '06 support at 11,670 making the average DOW forward P/E around 12. The average PE hasn't been this low since around 1980. Dow's historic 25-year average PE is around 21.

Anyway, these opportunities only come around a couple times in your life time, and to be successful as an investor, you need to take advantage of them when they do.

The fall was prompted by the subprime fiasco, and what is even more interesting, the crash was started in Asian markets based on rumors that some Chinese banks will have subprime losses to be write off their books. The numbers are not yet known, but I'm not that worried about it.

Record market losses across Asia prompted the crash on the DOW.

Talking about the tail wagging the dog.....

Anyway, I expect some turbulence to continue in the broad markets, but I strongly believe that the bottoms have been reached on DRYS, RIG and ACH and that these three of these stocks have the potential to increase 50%-100% within the next 52 weeks; especially DRYS.

Always remember my rule to set mental stops @7.5% below your average buy-in costs, especially for small and medium cap companies. Use mental stops and not computerized stop loss orders; MM's love to pick these off for cheap shares.

Over all, I'm still down about 3.5% on DRYS given my losses on two previous exited buys, but I should be at breakeven on 24 Jan and expect to double my money over the next 52 weeks on DRYS.

The BDI seems to be approaching a bottom and I expect freight rates to tighten up next week and average out somewhere between the BDI highs of last year and the lows were are seeing now.

FYI, Capemax rates should recover before Panamax rates given their relative support ranges set earlier in '07.

Because China built up a stockpile of iron ore last year as a ploy to get better '08 rates, they've greatly reduced their recent imports of ore over the past couple of months, but their stockpile is starting to run dangerously low and they'll have to start booking ore shipment before 07 Feb (Chinese New Years--year of the rat) if they are to avoid an out of stock situation in mid/end March.

Once China starts booking more ore shipments, the BDI will recover from its current lows. Once the BDI picks up, so will DRYS' stock price.

Buy low, sell high. What a concept.

Good luck trading.

DRYS HITS POSSIBLE REVERSAL

If you've been reading my blog, you'll know that I'm a big fan of Dryships (DRYS).

DRYS, like most dry shipping lines, has been hammered and has fallen over 50% since November.

This has been caused by a fall in BDI shipping rates (Baltic Dry Index), which is the index of spot shipping rates for bulk shipments. The BDI fall was triggered by the fear that a possible worldwide recession could adversely effect China's imports, which is the primary market for DRYS' vessels.

If a worldwide recession were to occur, it would have an adverse impact on DRYS' 2008 EPS, but I calculated that DRYS' 2008 EPS would be around $14.72 if BDI rates were to fall another 20%. This is a very bearish estimate as many of DRYS' vessels are locked into 1 year contracts so they are not effected by a fall in the BDI.

Assuming that DRYS' '08 EPS will be $14.72, (analysts' EPS consensus estimates of last week were $18.02) this would mean that DRYS' forward PE is currently 4.19. That is a real bargain given that the sector's average PE has historically been around 10.

Using my '08 estimates of $14.72 and a conservative PE of 10, it would be safe to assume that DRYS could reach around $150 within a year.

Last week Friday on January 11, a possible reversal occurred on DRYS, and it is my opinion that DRYS will rebound from $61.27 and initially rise to its next resistance at around $70. After that, I anticipate that it will trade laterally between $70 and $80 until DRYS' Q4 EPS and '08 guidance are announced around mid-February.

This is really a rare opportunity to take advantage of stock that could easily double in one year.

Do your own due diligence, but I seriously think DRYS has great potential.

Buy low, sell high, what a concept.

Samurai Stock Picks

The following stocks are, in my opinion, real gems and are seriously undervalued.



These stock all are trading at least 50% below their sum-of-present values and have the potential of doubling within this year:

BHP (BHP Billington/Australian Metals & Oil conglomerate)

FTO (Frontier Oil/Oil company)

DRYS (Dryships/bulk shipping company)

RIG (Transocean Inc./Ocean platform drilling company)

LRCX (Lam Research Corp./Semiconductor processing equipment manufacturer)

All of these stocks have excellent fundamentals in growing market segments.

I do have a caveat on LRCX as they have an outstanding accounting problem regarding accounting discrepancies on stock options. This is why LRCX is trading at such a low P/E (below 10) but at its current price, this is already factored in.

Do your due diligence, but all these stocks have the potential of making some serious money in the medium turn.

Buy low, sell high. What a concept.

Samurai's 10 Commandments for Stock Trading

1) Thou art not God and are fallible.

Warrant Buffet makes bad trades and you will, too. Get over it.

Whether a bad trade becomes a very minor nuisance or a disaster just depends on one very simple rule: SELL YOUR DOGS!!!!

The definition of a dog is very simple. When a stock closes below 7.5% of the initial purchase price, sell. Under no circumstances must this rule ever be broken. Even if CNN reports it’s raining diamonds in the company’s parking lot right before you sell just sell, sell, sell.

Forget your ego, never double down, never wait for a turnaround, don’t wait to make your money back, don’t try to figure out what happened, don’t be a doe in the headlights, just take the 7.5% loss and move on. It’s that simple.

Delete from your brain the idiotic and dangerous axiom that you only lose money if you sell. That’s complete and utter nonsense that will destroy you. Don’t fall in love with a stock; love the game and sell your dogs.

2) Thou shalt not adulterate thy portfolio.

Pick only the best undervalued growth companies in an industry (seldom the biggest) in terms of comparative fundamentals (net profit margins, sales growth, earnings growth, dividend growth, ROE, excellent management, low PEG ratios, exceptional products and services, rock solid balance sheets and earning statements). Don’t buy second-rate unproven companies with inferior products or services, regardless of being “undervalued”. Second-rate companies are “undervalued” for a reason: they are second rate.

Only pick stocks that have a story about them. (i.e. The company has the lowest production costs in the industry with expanding international and domestic sales and new cutting edge products in the pipeline. They will exceed the industry growth rate because….)

If the story changes for the worse, sell.

One of the best tools to evaluate undervalued stocks is by using the sum of present values. This computation simply determines the present intrinsic value of a stock based on its current earnings and projected long-term EPS growth rate; the two most important variables of any stock.

An excellent PV calculator can be found on smartmoney.com called the price check calculator:

http://www.smartmoney.com/pricecheck/index.cfm?story=worksheet&nav=dropTab

Please remember that there is no magic bullet in trading. Always remember that “constants” never are and “variables” always do….

There are always, and I mean always, reasons why a stock is undervalued. The key to making money in the market is finding out what these reasons are. Once you determine what these reasons are, the art and science is to determine:
a) Are these real or perceived problems?
b) If they are real, how are the problems being addressed?
c) When will the solutions to the problems most likely take effect?
d) What will be the net effect of the solutions to earnings?

If you can’t answer these questions, don’t buy the stock. (See commandment III).

Always take the worst-case scenario when calculating the net effects of solutions to addressed problems. Best case takes care of itself and given Murphy’s Law, even your “worst-case” scenario could end up being wildly optimistic.

With few exceptions you’ll, on average, make more money buying small to medium capitalized companies than large capitalized companies. Go with the odds. Historically, you’ll make annual returns of close to twice that of the DOW.

3) Thou shalt not gamble.

Never buy: penny stocks, falling knives, companies with major unresolved problems (scandals, legal problems, large pending lawsuits, stocks with unproven or long-term falling sales, overvalued stocks with crazy PEG ratios, etc.) and especially don’t buy companies with cash flow problems.

Never invest in a company if its EPS (earnings per share) appreciation is pending a resolution that could go either way. Remember Murphy’s Law and always sell your dogs!


4) Thou shalt not be ignorant.

If you are a novice, never and I mean never invest real money until you know what you are doing. Practice making various portfolio simulations on Internet sites such as smartmoney.com, etc., until you can consistently make an annualized 15% return (The S&P 500 historical average is about 10% per annum). Read numerous books on stock trading and understand how to read and interpret: earnings statements, balance sheets and know how to value stocks.
There is a lot of tutorial information on smartmoney.com that will teach you all the fundamentals you need to get started.

If you are an experienced trader, never stop learning. Learn more complex things like stock options, shorting stocks, hedging, technical analysis, derivatives, etc. by continuously reading books, surfing the net and getting involved with on-line investment chat rooms.

Never become complacent with your knowledge. You can always learn more.

5) Thou shalt not be a swine.

The old saying, “Bulls and bears make money but swine get slaughtered.” is very true. Make your money by buying “too” late and selling “too” early. Let the swine try to guess the bottom 10% and the top 10% and learn to enjoy the 80% lower-risk middle ground.

Never buy falling knifes and set entrance and exit points for every stock you own. When a stock meets your targets, sell and move on. Don’t fall in love with a stock. Take your profits and move on to the next one.



6) Thou shalt not hold more than 3 stocks

Holding more than three stocks greatly lowers long-term returns. It’s impossible to conduct proper DD and monitor too many stocks. Holding just three stocks forces detailed comparative analysis to determine which three stocks make it in your portfolio.

Never, and I mean never put all your eggs in one basket, but do put them in just a FEW baskets.

Never forget the first commandment.

7) Thou shalt not covet thy neighbor’s portfolio

Don’t worry what hot stock jumped 30% in one day or what your uncle Bob says is the next “sure thing”. Have confidence in your portfolio, but sell your dogs. Undervalued medium-cap growth stocks with stories behind them will almost always win in the long run.

8) Thou shalt not invest more than you can afford to lose

Never borrow money to invest in the stock market. Start off slow if you need to and add funds to your portfolio as nonessential income becomes available. Compounded gains grow to incredible levels over time so there is no need to dig a hole of debt.

Trading on margin is fine, but be sure that you have sufficient nonessential funds to back it up in the event of a margin call. Margin calls should never be a problem if you follow the first commandment.

9) Thou shall start investing as soon as possible.

After you learn the basics and have practiced building simulated portfolios on smatmoney.com AND are beating the S&P 500 in your simulations then start as soon as possible.. Just do it. Don’t procrastinate. Start off small but get started. Compounded gains grow at incredible rates. As you become more proficient and gain confidence, add more to your account.

Starting with just $10,000 and adding 3,650/year (just $10/day) at 15% compounded gains for 30 years will grow to over $2,500,000. If you took that same money and stuck it under your mattress, it would only amount to only $119,500….

http://www.moneychimp.com/calculator/compound_interest_calculator.htm



10)Thou shalt trade by set rules

There are basically two types of traders: value and momentum investors. Both types make money, but you need to determine what system works best for you and stick with it.

Stay focused on just one strategy, stick with it and become an expert. Don’t mix stocks of different strategies in your portfolio. They require different disciplines and you’ll lose focus.

Always trade with what’s between ears and not what’s between your legs. Don’t become emotional and don’t trade too often, but never forget the 1st commandment: SELL YOUR DOGS!!

Decide on WHAT to buy using Fundamental Analysis (FA), and decide WHEN to buy on Technical Analysis (TA). Not the other way around. If you’re just starting, don’t try acting on Technical Analysis until you have a lot of experience. TA is, by definition, is, well, technical and takes a lot of hard study, practice and discipline to use it correctly.

There was some very interesting research done at the University of Chicago, which found a phenomenon they ended up calling, the house-money effect, which seems to be hard wired into the human brain. Simply put, humans are predisposed to sell winners and hold losers. The complete opposite of what you need to do to make money.

I guess it all boils down to this axiom a very smart trader once said, “The market is driven by fear and greed. The problem with most people is that they are greedy when they should be fearful and are fearful when they should be greedy.”

Buy low, sell high. It sounds so simple in theory but it takes real discipline to actually do it.