Bes Stocks To Buy 2014, Best Stocks For 2014: DryShips Shares Surged: What You Need to Know

Tuesday, March 27, 2012

DryShips Shares Surged: What You Need to Know

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of Greek shipper DryShips (Nasdaq: DRYS ) caught a nice tailwind today, rising as much as 18% in intraday trading on some positive news from majority-owned ocean driller, Ocean Rig (Nasdaq: ORIG ) .

So what: Though DryShips spun off Ocean Rig as a standalone company, it still owns the majority of the driller. That means that good news for Ocean Rig is good news for DryShips.

Today, Ocean Rig announced that it had won a three-year drilling contract for its Leiv Eiriksson semi-submersible that could represent as much as $653 million in revenue backlog. That's significant for a company that reported total revenue of $462 million for the first nine months of 2011 and had a backlog of $1.79 billion as of Sept. 30 of last year.

Now what: As we look at this big jump for DryShips, an obvious question is why that stock is going sky-high but Ocean Rig was up a mere 2% today. Part of the answer is that for many traders, DryShips is simply where the action is at. The stock has been hugely volatile for years and has massive trading volume. The stock's three-month average daily volume is 4.6 million shares, and today it's seen an impressive 27.7 million shares change hands. Ocean Rig, on the other hand, has a three-month average of just 139,000 shares, and it traded just slightly less than that today. Even after adjusting for the differences in share prices, the trading volume of DryShips still vastly outweighs that of Ocean Rig.

In other words, the size of the stock's move today may have more to do with the stock's volatility than the value of this specific announcement. It's simply a very volatile stock that's b! ound to react sharply to news in either direction.

That said, though, there is some legitimacy to the move as the shipper's stock has been brutally beaten down and currently trades at valuation levels well below that of Ocean Rig. With a lower relative valuation and more pessimism -- and therefore short-selling -- associated with DryShips, there are some good reasons for the stock to react more drastically to significant news.

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