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Turnaround investors have always looked for investment opportunities in companies that have filed for bankruptcy. On the surface there is no other investment sector that epitomizes the mantra of looking for hidden opportunities in down-and-out companies that are poised to rebound. There are few things as exciting as buying the stock of a company when it hits rock bottom and riding it to triple-digit gains following a successful turnaround. It is this feeling that continually draws investors to the Chapter 11 bankruptcy sector.
Turnaround investments can indeed generate some of the most exciting profits you will ever experience. However, the bankruptcy arena—like all investment sectors—can be risky if you don’t do your homework.
On one hand, we almost never recommend purchasing stocks of companies in Chapter 11 as they almost always end up worthless (or close to it). To come out of Chapter 11, a company must satisfy all of its other creditors before it can give stockholders anything. It is a very rare bankruptcy proceeding where there is any real value left for stockholders after all the other creditors have been paid off. Most of the value in the business (often represented by new stock) will go to holders of the company’s debt and other obligations though some investors will look at bankruptcy stocks for “short sale” opportunities.
On the other hand, stocks of companies that have emerged from bankruptcy are often undervalued. When a company uses the bankruptcy process properly, it can emerge as a much stronger business, often with a very healthy balance sheet. But most investors don’t realize this, and they think of the old, troubled company when they look at the stock. Therefore, these post-bankruptcy stocks are often over-looked and under-valued.
A third option is bonds. Under one of the key principles of bankruptcy law—known as absolute priority—bonds have to be paid off in full (sometimes with accrued interest) before the stockholders receive anything. Occasionally, in order to expedite the proceedings, the bondholders will allow the stockholders to receive a little value before the bonds are paid in full; but you can generally count on the bonds getting paid off before the stock gets anything. This means that if the bonds in a bankrupt company are trading for 30 cents on the dollar, you will more than triple your money by buying the bonds—before the stockholders receive anything. Of course, the bonds are not always a slam dunk because, in a lot of Chapter 11 reorganizations, there is not enough value in the company to pay bond holders in full. In short, you are hedging that the reorganized value of the bonds is going to be greater than what they were trading at when you purchased them.
Given all of the potential benefits, the bankruptcy sector is always of tremendous interest to The Turnaround Letter. TurnaroundLetter.com’s bankruptcy pricing pages, like everything on the site, serve as a value-added resource of timely, critical information and data that will help you prosper in the turnaround space. Towards that end, subscribers now have access to our “Bankruptcy Securities” feature, where we provide current and historical pricing of these three main investment options within the Chapter 11 bankruptcy arena.
For those turnaround investors looking to further diversify with bankruptcy bonds, this chart offers current and historic (often hard-to-find) pricing details. Turnaround Letter subscribers know that George always recommends a healthy mix of stocks and bonds—and other assets for near and long-term financial security. “Busy Month for Bankruptcies: Interesting Investment Opportunities” explores these investment opportunities.
These historic pricing details cover stocks for large companies that have recently emerged from bankruptcy—i.e., post-bankruptcy securities. Post-bankruptcy stock options are a key component of The Turnaround Letter’s investment approach. “Reorganized but not Respected” offers more thoughts on this strategy.
This data includes historic stock pricing for large companies currently operating under Chapter 11 protection. Before doing your turnaround research here, be sure to re-visit George’s advice and warnings on buying the stock of companies still in active bankruptcy proceedings.
A TurnaroundLetter.com subscription includes access to historic and real-time securities pricing data charts—yet another invaluable resource to help our well-informed turnaround investors gain maximum returns.
The Turnaround Letter is one of the most successful and long-standing investment newsletters on the market today. Investors of all levels of experience and backgrounds have benefited from its market-beating stock recommendations, exclusive commentary and George’s invaluable insight since 1986.
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