DCIX Follow Up - $5.09

DCIX is causing a lot of short-term pain and is one of the primary drivers why I'm down ~2%+ so far this year. Unfortunately I made it a 8% portfolio position before it sold off ~30% in the last week. I had incorrectly assessed that investors would start to wake up to the dividend potential with their 2Q'11 results as I though management would consider laying out in detail how much of a dividend they could start paying out next year. At a minimum, I think they start paying out $0.50 next year or a ~10% yield.

DCIX Story:

• At $5.09, DCIX has a $117mn market cap.
• They have $43mn in net cash (as of 6/30/11 - but keep in mind they'll likely use it to make another acquisition soon). 
• The book value of the boats they recently acquired in the last 2 years is $161mn. 

So take the market cap and subtract their net cash and your paying $74mn for boats marked at $161mn. A 55% discount to their purchase price after depreciation.

The Fear (putting logic behind the sell-off other than the idea it may have just been a big seller who was desperate to sell)

The reason why the stock has sold off is because there's a general fear that the global economy is about to collapse, leading global shipping rates to collapse.  If this happens then will DCIX really be able to pay a dividend when they recharter their boats in 2013?  Probably not. But will they go bankrupt, nope.

My conclusion is that even if charter rates collapse to a level that is unprofitable for DCIX through 2013 (which keep in mind would be a hell of a recession / depression) their annual operating expense is ~$4mn. They could burn cash or liquidate boats to hold them over for when rates improve.  When they do, you'll ultimately be sitting on an asset that if purchased at current prices will start paying you at least a 10% dividend.

Conclusion
I consider this sell-off a good reflection of the volatility and opportunity in small cap stocks. All it takes is a few large sellers to crush the stock. That said, I think anyone who buys right now and can stomach the volatility, will be in the money.

Disclosure: I own DCIX.