DryShips Inc. (NASDAQ:DRYS) has not been an easy stock to hold this year. The company is down more than 99% over the last three months and has conducted five reverse splits since the start of 2017. The splits have multiplied share price by a factor of more than 7000 and repeated dilutive raises have eaten away at per-share valuation for those holding on to a position. A stock purchase agreement with Kalani Investments has soured market sentiment to levels rarely seen even at this end market and lawsuits circling both the company and its CEO are compounding the sentiment in question.
For a day trader, however, the story has been quite different.
The company has provided ample flip opportunities on both the long and the short side of the markets and has built up a considerable following on both of these aforementioned biases. The bulls point towards macroeconomic trends and the company’s operational fundamentals as eventually being able to overpower the large short stake that weighs heavily on the company’s share price and that – to date – has overpowered support on numerous occasions. The shorts point to capital structure and management failure as indicative of the company’s inability to take advantage of the trends highlighted by the bears.
All this could be about change heading into the weekend, however.
Premarket on Friday, NASDAQ halted trading in DryShips ahead of what it referred to as a pending news release. The message boards lit up with rumors as to what this release might entail – another reverse split? More dilution? Something to do with Kalani? CEO out?
Well, the news just hit press and – to put it simply – it’s about as positive as it could be given the company’s current situation.
As per the release, the above-referenced stock purchase agreement with Kalani Investments is now canceled, meaning the toxic impact that this agreement brought with it should no longer be a problem. Concurrent to this announcement, we also got news that CEO George Economou will either directly or through affiliated entities acquire $100M shares at $2.75 per share and he won’t be able to sell any of these $100 million worth of shares for the next six months at a minimum. Given yesterday’s close price in around $2.05 a share, we think there is an incredible opportunity here for a short squeeze.
As this news hits press and markets absorb its implications, there is only really one way of interpreting the report. Sure, there is some dilution associated with the $100 million worth of shares acquired by Economou and sure, there is some degree of overhang associated with the Kalani deal, but when weighed against the spectrum of negative rumors associated with the above referenced trading halt, a $100 million cash injection and a cutoff of toxic financing is great news. At least initially, that it, and for the next 6 to 8 hours, it’s this line of sentiment that is going to take control.
Once things settle down and the market draws to a close for the weekend, the interpretation becomes a little less clear. An extra 48 hours to absorb the news may lead some of the bulls to reverse their bias to the downside. As far as today’s session goes, however, we think this one is only going one way and that’s up.
Bottom line, there are probably plenty of naked shorts out there right now scrambling to minimize the loss they are going to take on this just released news. We wouldn’t want to be in their shoes. For any of the longer term holders already in this stock, today’s action should serve up some well-needed reprieve on the losses taken over the last few months.
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Image courtesy of Taras Kalapun via Flickr
Disclosure: We have no position in DRYS and have not been compensated for this article.