After you’ve determined what got a company into trouble, you want to evaluate whether it can get out of trouble. In this next note in our continuing series on investing in distressed securities, The Turnaround Letter explores the next step as you evaluate your possible investment.
You have probably noticed that we are increasingly using EV/EBITDA as a valuation measure, rather than the better-known price/earnings multiple. We thought it might be useful to describe this measure and why we like it.
Focusing on how to find publicly traded distressed securities that might be promising investment candidates, The Turnaround Letter continues its series on investing in distressed securities.
We focus on distressed bonds and explore some reasons why their returns can be so high in this second note of The Turnaround Letter's new series on investing in distressed securities.
The Turnaround Letter is launching a new series on investing in distressed securities. In this first note, we delve into the question of “what is distressed securities investing”?
In nearly every case, the shares of a company in bankruptcy become worthless. In very rare cases, however, they can become great investments. W.R. Grace (NYSE:GRA) shares produced a 75-fold return, as an example.
With California utility PG&E (NYSE:PCG) now in bankruptcy, the range of possible outcomes for its equity is wide.A straightforward approach would put the range at a total loss (-100%) to +400% gain.
A back-of-the-envelope estimate might put the upside at $25-40 for a 79% to 185% potential return – generous but risky given the real possibility of a 100% loss.
Buying PCG shares may make sense for sophisticated investors able to tolerate a total loss, but not for nearly anyone else.
In nearly every case, the shares of a company in bankruptcy become worthless. The company’s liabilities exceed its ability to pay them, and typically its assets don’t have enough value to cover the obligations, either. Once the remaining value gets carved up among various creditors, there is usually nothing remaining for shareholders. Sears Holdings, now in bankruptcy, will likely go this route.
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