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Post-bankruptcy stocks are often undervalued because they are usually ignored by mainstream investors who perceive them (often wrongly) as being of poor quality and very risky. These investors remember the bad things that happened to the company to force it into bankruptcy. What they don’t understand is that many companies take advantage of Chapter 11 to reshape their businesses and balance sheets so that they emerge as very strong competitors. As a result, post-bankruptcy stocks can provide good returns to savvy investors who are not swayed by their past history but focus on the future prospects.
After recently introducing our Post-Bankruptcy Stock IndexTM (PBSI), several readers have asked how they can best use the Index to uncover potential stock profit. We created the PBSI with three objectives. First, we wanted to show that at least over certain time periods, post-bankruptcy stocks can significantly outperform more mainstream stocks. The PBSI is already proving this point quite effectively. Over the past 12 months, the PBSI has gained 40.7% compared to 16.9% for the S&P 500. It is also worth noting that the 12 post-reorganization stocks highlighted when we last wrote about this area in September 2011 have gained an average of 73% compared to 38% for the S&P 500 over the same time period.
Second, we wanted to highlight some of the more actively traded post-bankruptcy stocks for investors who want to add some post-bankruptcy opportunities to their portfolio. Finally, we thought that the Index could provide a useful gauge as to whether post-bankruptcy stocks were more in favor than usual or more out of favor than usual at any given time.
While the PBSI shows that post-bankruptcy stocks have outperformed over the past year, they have only performed more or less in line with the broader stock market over the past several months and have actually underperformed the NASDAQ Index over the last 3 months (PBSI +7.1% vs. NASDAQ +10.8%). That suggests that while this may not be the absolute best time to buy post-bankruptcy stocks, it’s not a bad time either.
The October 2013 issue of The Turnaround Letter identifies 10 stock picks—each of which emerged from Chapter 11 over the last several years and look to us as though they are still undervalued. We also offer a few thoughts on a very prominent name that recently emerged from Chapter 11 protection and whose post-reorganization stock is likely to begin trading soon. Learn more about our most current post-bankruptcy stock picks.