DRYS Background: Rapid Growth to Severe Downturn
Founded in 2004, DryShips Inc. (Nasdaq: DRYS) was the first dry bulk company to hit the U.S stock market. Its January 2005 IPO came at the cusp of the shipping super-cycle when the DryShips fleet was booming. The company expanded into the ultra-deepwater drilling business with an arsenal of 38 proud vessels. The shipping industry, and along with it, the price of DRYS, were flying high in late 2007 and early 2008.
The high growth lasted for a few years before the far-reaching financial crisis of 2009 reared its ugly head. DryShips saw demand for its services slow sharply. Management began to steer its focus toward the ultra-deepwater and tanker operations. It desperately sought financing and in 2014, had a $350 million add-on equity offering that was oversubscribed.
By 2016, the dry bulk and fossil fuel shipping industries was experiencing a severe downturn. The company’s CEO, George Economou, kept DryShips afloat by purchasing vessels and later buying out lenders. By the fall of 2016 challenging market conditions went from bad to worse. This set the stage for one of the most spectacular short-squeeze events in recent stock market history. Investors, Day Traders, and even Penny Stock traders joined in for the fun.
DryShips (DRYS) Does the Reverse Splits
With the shipping industry in dire straits and DryShips in danger of being delisted form the Nasdaq for its a low share price, the company embarked on a pattern of reverse stock splits. The first split on March 11, 2016 was a whopping 1:25 split. This effectively turned a 1,000-share DRYS position into a mere 40 share DRYS position. Five months later, in August 2016, a second reverse split was announced, this time of the 1-for-4 variety. With the stock continuing to nosedive, DryShips was back it at just two and half months later with a 1:15 reverse split. In effect, three very dilutive reverse stock splits in less than 8 months, quickly turned 1,500 DRYS shares into a single DRYS share.
Short Interest Builds
Winter was just setting in and DryShips was already in a deep freeze with very little trading volume or price movement. Meanwhile, short interest in DRYS had been building and reached a very high level. DRYS had a market cap at the time of around $100 million. This likely meant the short activity was coming from retail investors rather than hedge funds and other institutional investors who generally did not get involved in a company of this size. Zacks
Between late March and late October, what would later prove to be very ill-timed short interest had quickly increased from less than 500 thousand to almost 1.7 million shares held short. Meanwhile, the barrage of reverse stock splits had pushed the float on DRYS down to 1 million shares. The smell of burning fossil fuel and a short squeeze was in the air. ValueWalk/Sentieo
The Catalysts: Potent 1-2 News Punch
DryShips reported its 2016 third quarter earnings on November 9th recording a $5.2 million loss. The loss was not a big surprise, but some investors lauded the rhetoric surrounding management’s debt structuring plans.
That same day it was also announced that Donald Trump had won the election for U.S. President. It was a stunning result for America and a surprise boost to shipping stocks. Trump’s victory was perceived as a win for DryShips and its peers due to campaign promises of domestic infrastructure spending.
These headlines helped set off a major short squeeze trading event in DRYS and other shipping stocks. On November 10th DRYS suddenly jumped 133% in above average volume.
Docked: DRYS Trading Halted
With a DryShips storm brewing and the shorts battening down the hatches, Nasdaq halted trading in the security on November 10th. DRYS had risen almost 200% on volume of 5.7 million shares, far above normal levels. With DRYS at $73 at 2:36pm EST and suspicions swirling surrounding the company’s debt restructuring, “additional information” was requested from the company.
DRYS would also be halted in each of the next three sessions. The November 10th burst was followed by a 14% rise the next day. Traders then had the weekend to digest the news and when trading re-opened on November 14th DRYS had a massive 215% gain. Daily trade volumes began hitting the 10 million share mark. It was truly ‘game on’ for the squeeze. The slow sinking DryShips had shockingly risen nearly tenfold in 3 days. Bewildered shorts were left scrambling to cover their position as DRYS began climbing fast seemingly out of nowhere.
The Big Squeezy
DryShips kept the party going on November 15th with a 70% gap up at the open. The upward momentum in DRYS accelerated throughout the day in heavy volume. At the peak DRYS had exploded from $4.75 to $120 over the course of a 4-day, 2500% meteoric ascension.
It became clear that this was a not a fluke event. To the contrary, it was a massive short squeeze prompted by the one-two punch of a relatively positive DryShips earnings report and, to a greater effect, an industry-favorable U.S. election result.
The four-day short squeeze event in total saw volume that was more than 30 times the float. On the day of the squeeze peak, DRYS short interest had quickly dried up to roughly 130 thousand shares as short positions largely covered. When the data shows a parabolic price move in conjunction with a big decline in short interest from a previously high level, this is generally supportive of a short squeeze phenomenon.
Wells Fargo analyst Michael Webber concluded that momentum algorithms were also at play saying, “While we believe the retail momentum and short covering likely got this trade going, given the sheer size of the volume and the continued (relentless) pricing movements, we believe momentum-based algorithms–quant trading–are likely a very significant factor/catalyst at this point.” Yahoo Finance
Trading Resumes, DryShips Runs Aground
The November 2016 move in DryShips was a short squeeze of Noah’s Ark proportions. The storm calmed and dawn broke on November 17th. The short selling animals staggered off the ship two by two just in time to see DRYS start to come back down to earth.
When trading resumed at 10:30am EST on November 17th, buy demand from covering short sellers had dissipated. DRYS quickly plummeted 79% and was halted four times in the process. The dramatic decline gained momentum after DryShips announced an agreement to sell $20 million worth of convertible preferred shares. This meant significant dilution for current shareholders. Seeking Alpha
By the time the bloodbath was over, DRYS was down 90% on the day. DRYS had dropped even faster than it ascended. Although the drop occurred two days after the short squeeze spike of November 15th, this drop really took hold in one session because trading was halted for the entire day on November 16th.
The Squeeze Lesson
The laws of supply and demand were on full display back in November of 2016 in the trading pattern of DRYS. We learned that a low float/high volume stock combined with a poorly timed short position can lead to a parabolic short squeeze event.
It is important to keep in mind, though uncommon, these trading patterns will pop up from time to time. There also exists the potential for sympathy runner stocks as we saw in the case of DRYS. This means other stocks in the same sector had similar, outlandish price movements because investors often feel the fortunes of one company are linked to the fortunes of other companies in the same business.
Those that were able to recognize the unusual price and volume movement in conjunction with the outstanding short interest had the potential to lock in extraordinary short-term trading gains. Swing traders that got greedy and stayed in the game too long, suffered a catastrophic drop in a single session. Short squeezes of this magnitude are rare, but when they happen it can literally make (or break) a trader’s year.
Update: July 2019
On a more current side note, through 6/28/19, DRYS short interest was over 1.6 million shares. Although DRYS has roughly 98.7 million shares outstanding, over 83% is owned by insiders and not available to the public. This leaves approximately 16 million public shares for a short interest ratio of around 10%. This is a far cry from levels seen during the short squeeze of November 2016. However, a company with a propensity to execute reverse splits (resulting in a low float) is always at risk for a short squeeze with or without a catalyst. Can lightning strike twice in the same stock? Stay tuned! ShortSqueeze