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.