DryShips' Financials Don't Inspire Confidence

Last week I took a look at DryShips (DRYS - commentary - Cramer's Take), because there's been some discussion about this company, and the stock is way off its highs. Clearly, any stock that goes from over $100 to below $5 at warp speed merits at least a look. The stock is not in the financial arena, so it becomes more analyzable in my view.

Although we are clearly in a trading environment and not in an investing environment, I wanted to spend a little time on how I analyze companies. In other words, is there something more to the company than just a trade? The first thing I look for is whether the company is making money. For this task, I use the income statement.

Secondly, I look to see if the company has decent free cash flow. I use a statement of cash flows for this analysis. Third, I try to understand the industry and look at whether the company has a competitive advantage. Some industries I have very little investment interest in, such as airlines and automobile manufacturers.

After this cursory look, I engross myself in the particular financials of a company. I will look at footnotes, inventory methods, pending lawsuits, etc. I don't like surprises, and reading will definitely help in this area. I look at the troughs and peaks of earnings and sales that have already occurred and try to understand what moves them. For instance, if there was a big drop-off in sales six years ago, I try and figure out what happened. If there was a big spike in earnings three years ago, I look at all that was written about the earnings spike for an explanation.

My attitude is that business is business, and what has occurred in the past will most likely occur again in the future, but as an investor I don't like surprises. If everything looks good and we are in a bull market or near the end of a bear market, it is time to act. I don't place a lot on projections or opinions, as nobody knows the future.

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At the time of publication, Horlbeck had no positions in stocks mentioned.

Todd Horlbeck is president and founder of Horlbeck Capital Management, which he founded in 2002. Horlbeck was previously an investment broker at AG Edwards & Sons for 11 years. He is a graduate of the University of Wisconsin-Madison and lives in St. Charles, Ill.