Those who were shorting DryShips Inc. (NASDAQ: DRYS) are taking a hit today because this was one stock in which short interest was very high but its price skyrocketed suddenly. The shorts got killed because of a massive squeeze that sent DryShips shares soaring 2,000% in a matter of days. The NASDAQ halted trading on them today at $73 per share, saying that it has requested “additional information” from the company

Short interest in DryShips all over the map

Data from Sentieo shows that short interest in DryShips has been all over the place this year, but it has been soaring since late August. As of the end of October, nearly 1.7 million shares of the shipping company were being sold short.

Courtesy: Sentieo
Courtesy: Sentieo

Today’s 2,000% increase isn’t just an isolated incident in this stock either, as for the four trading days through Tuesday, DryShips stock was up 740% in a massive days-long rally that’s come on the heels of two major events. One is the company’s last earnings report, which was Nov. 9, and the other was Donald Trump’s surprise win in the election, which is widely being seen as good for shipping stocks because he has promised to boost infrastructure spending.

Other shipping stocks and also prison stocks have spiked in the days since Trump’s win, triggering massive short squeezes in names such as Eagle Bulk Shipping, SAExploration Holdings and Corecivic. However, Trump may not be the reason there has been so much unusual activity in DryShips shares.

DryShips tries to restructure its debt

As of this writing, trading on shares of DryShips has not resumed, and there is no indication from the NASDAQ when it might resume. The stock exchange said in a press release that it will not resume trading on the stock until DryShips “has fully satisfied” its request for “additional information. It’s unclear what type of information the NASDAQ might be waiting for, but we do know that the company is in the process of restructuring its debt.

It said in its earnings report on Nov. 9 that it sold its vessel Ocean Crystal to Panamax, delivered the ship to its new owner, and will use the proceeds from the sale to pay down the related loan facility. DryShips also said in the earnings release that it continues to work with its lenders to restructure its bank facilities, three of which have already matured. The company said it hasn’t made the final balloon installment on them and has decided to suspend payments on the rest of its bank facilities to preserve its cash liquidity.

DryShips Inc. DRYS
Chart via S&P Capital IQ

Who’s getting squeezed by DryShips?

DryShips doesn’t seem to be a popular short position among major hedge funds, with the main reason being that its market capitalization of around $141.1 million makes it too small for large funds to be interested in shorting it. It’s most likely retail investors and smaller funds that had short stakes in the company, as we haven’t seen it mentioned in any of the hedge fund letters we’ve read recently.

Is it a short squeeze though?

S3 Partners, a financial analytics firm, in a report titled “Dryships Is NOT a Short Squeeze” notes:

§ Social media and financial news outlets have been touting this move as one of the most impressive short squeezes in recent memory.

§ Dryships reported its 3rd quarter results on November 9th, a loss of $5.2 million or $7.70/share.

§ In order to stay afloat, Dryships is negotiating with its lenders to restructure its bank facilities and suspend payments on some of its loans temporarily to preserve any remaining cash liquidity.

§ With Dryships having sold off most of its fleet in the last three quarters, defaulting and suspending payments on several of its loans, and the general drybulk shipping business in turmoil, it would be a quite a reach to call this stock a possible turnaround or value play.

§ In fact, Dryships has been forced to execute three reverse stock splits this year in order to keep its stock price high enough to remain listed and not be relegated to the Pink Sheets.

§ An investor that owned 1,500 shares of Dryships in January of this year would only own 1 share today.

§ Dryships’ recent price move is spectacular, but it is not a short squeeze; instead, day traders are bidding up the price of DRYS quite aggressively in hopes of short-term profits.

And

§ So, with only 1 million shares of float and over 31 times its float changing hands in less than a week, Dryships’ recent trading has been a multi-day spiraling and intra-day bull momentum play.

§ Dryships has turned into a game of musical chairs, except for the last traders who will be sitting and holding onto their shares as the bubble eventually bursts and they lose.

§ At some point, buy-side demand will wane and the risk-reward of jumping back into the trade will no longer be attractive.

§ The traders holding Dryship’s 1 million shares of float will see the stock price slip back to its “pre-tulip” craze levels of $5 per share.