Dry Bulk 2010: Five Stocks to Watch

DryShips

The granddaddy of them all, the first dry bulker to go public in the U.S., DryShips(DRYS) is also by far the most liquid name in the sector, its shares used by hedge funds and retail day traders alike to make short-term bets on the vicissitudes of the often volatile dry-bulk industry.

DryShips suffered through a rougher 2009 than many of its peers. Having levered up in the boom years, the company saw its debt came back to haunt it after the crash. DryShips had to totally recapitalize, raising capital through a series of at-the-market offerings that diluted shareholders vastly. As of Dec. 29, its stock was trading just south of $6 a share, having sank 43.8% year-to-date, making it one of the worst performers in the sector.

The company has also switched parties, so to speak, going conservative. Its converted itself from a shipper 100% exposed to the rowdy spot market to a shipper with 100% of its vessels booked into stolid long-term contracts for 2010.

But that doesn't mean DryShips has become any less lively. Of late, the excitement hasn't come from its dry-bulk business. Instead, the hubbub surrounding the company and its controversial CEO, George Economou, has centered on its "drillships" business, which operates mobile offshore drilling rigs that specialize in probing for oil in extremely deep waters.

Economou has long said he wants to separate the drillships unit with an IPO. The only problem? DryShips still lacks about $1 billion in financing to pay for the rigs and won't get the money until it strikes charter deals with an oil company, guaranteeing cash flow that a bank would feel comfortable lending against.

Deutsche Bank(DB) recently initiated coverage of DryShips with a buy rating and a $10 price target. Urs Dur, an analyst at Lazard Capital Markets, is bullish on the stock, noting that the drillships business looks robust. He also mentioned a recent offering of senior notes that has reduced DryShips' net debt-to-cap ratio to below 40%. Still, Dur says, his research reports on DryShips are always "thick with risk factors," mostly because of the company's somewhat checkered history. "It's risky, but there's upside," he says.