Practicing the Art of Patience 165two general ways in which a security can qualify as being underval-
ued with respect to intrinsic value:- Market price is comfortably below intrinsic value, or in
certain cases net asset value. - Growing intrinsic value provides undervaluation.
We explore both of these ways in the next section.DryShips: Hidden Value in the Assets?
An interesting example of an undervalued security can at times
occur when the price of company X is trading below intrinsic value.
For example, at the end of 2008, shares of DryShips (DRYS), a dry
bulk shipping company, hit a low of $ 3 a share, having once traded
as high as $ 115 per share. The severe economic recession that
engulfed 2008 sent shipping rates down over 90 percent, which
had a greater effect on DryShips due to its greater exposure to spot
market shipping rates. Nonetheless, DRYS had average earnings
of over $ 5 a share over the past several years, so if future earnings
were even a fraction of this, the current price suggested a potential
undervalued investment opportunity. Still, in spite of the unprece-
dented market correction and anticipated prolonged market reces-
sion, further analysis was needed to determine if DryShips was still
cheap assuming several years of deeply depressed shipping rates. Table 8.1
is an initial balance sheet analysis based on the most recent fi gures.
It would appear that the implied book value of $ 49 a share
against a share price of $ 3 a share refl ects a grossly undervalued
asset based on liquidation value alone, saying nothing of future
earnings power. However, the more conservative, and necessary, bal-
ance sheet analysis would require investors to value each individual
item in the balance sheet and make the necessary adjustments to
refl ect the current market conditions. In this case, the analysis is
shown in Table 8.2.CH008.indd 165CH008.indd 165 9/2/09 11:48:59 AM9/2/09 11:48:59 AM