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W.R. Grace (stock symbol GRA), a specialty chemical producer, emerged from Chapter 11 earlier this month after nearly 13 years in bankruptcy and provided a couple of lessons to investors. The first lesson is that bankruptcy proceedings can last a long time. This is especially true when the bankruptcy filing was precipitated by asbestos liabilities, as was the case with Grace. Other prominent--and lengthy--asbestos bankruptcies include Manville (six years in Chapter 11), Owens Corning (six years) and Raytech (17 years).
The other lesson, which is actually a confirmation of a lesson that we’ve seen in two other cases recently (American Airlines and Overseas Shipholding Group), is that there are exceptions to even some of the most reliable investing rules. In this case the rule is that the stocks of companies in Chapter 11 almost never do well. It is very rare that a company in Chapter 11 will have enough value to satisfy all of its creditors and have anything left over for stockholders. As a result, the stocks of most companies in Chapter 11 end up being worthless or almost worthless.
Grace was definitely an exception to that rule. While the stock dropped below 2 when the company filed for Chapter 11 in April 2001, it recovered several years later and has been on a fairly steady climb ever since, recently trading above 100. Unfortunately, we didn’t recommend buying the Grace stock at its lows, but we did highlight it as an interesting speculation in December 2002 when it was trading a little above 2. We highlighted it again in late 2006 when the stock was about 16.
Now Grace is considered a fairly mainstream stock, and therefore is probably not dramatically undervalued. Nonetheless, since it recently emerged from Chapter 11, we have added the Grace stock to the Post-Bankruptcy Stock IndexTM.