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From time to time we’ve written about the gain potential in post-reorganization stocks (the stocks of companies that have emerged from bankruptcy proceedings). As we’ve said, they are often undervalued because many investors shy away from a post-reorganization stock as a result of bad memories of the company’s prior problems. Often the company will have used Chapter 11 protection to solve those prior problems and it will have emerged as a lean and powerful business. However, recent news about two companies with well-known names serves as a cautionary reminder about post-reorganization securities.
AMF Bowling and Hostess Brands have both been in the news because they are back in bankruptcy for the second time. People sometimes give these cases the informal name of “Chapter 22”--in other words Chapter 11 twice. Both companies have iconic brands, which is usually a good sign. At least for those of us of a certain age, AMF is known for dominating the bowling alley business in the industry’s heyday in the 1960’s and 70’s. Hostess makes the well-known Twinkies, as well as other tasty (but not-very-healthy) snack foods.
For a post-reorganization stock to be a good buy, the company must have used the Chapter 11 process properly to reshape its business. If the company was not aggressive enough in making changes during bankruptcy, it can end up back in Chapter 11 (or in Chapter 22, if you will), as was the case with both AMF Bowling and Hostess Brands.