One interesting page in Value Line each week is a list of about 50 stocks selling below book value. Some in bankruptcy like KM made the list when it was at about .70 and others like Crown Cork and Seal that had other issues make the list. These both have had nice runs, since hitting the list. I suppose this would be a good place to start. The other thing would be to look at 13D filings to see if an activist share holder is starting to play. Read an interesting book called Vulture Investors on this topic. Seems a lot of guys/gals that play this game buy the debt and wait for the spread to close, plus they get paid to wait.
I've been holding this play since January, and today some company named Fiber Optek outlined some 7+ billion bailout plan. Global X was my introduction to bankruptcy plays. Doubled my position at .11 and .13 today. Hope this turns into a positive learning experience
I've been following this bankruptcy for quite some time. They basically went on a downward slide due to poor management plus a change in the tariffs on bananas being imported to Europe. Eventually they declared bankruptcy and emerged with a pre-packaged restructuring where basically the debtholders got about 97% of the company. The reason I was following this is because I expected the stock to tank once it emerged. I assumed that the debtholders were mostly from bond funds that wouldn't be allowed to hold equity due to their charter. Also, the new management has 3 months to price their options. Its in their best interests for the stock to tank and if you read any of the public comments by the new CEO they are unusually bearish on the company he runs. Nevertheless, the stock has held up and I think there is basically no upside here. I am looking to buy in the 12-13 range but it doesn't look like it will hit there. Excellent thread by the way.
if you go to bankrupt.com you can subscribe to the troubled company reporter, which is an excellent resource for info on bankruptcies.
I like to play companies that are near bankruptcy but have a chance of pulling out. I do it by playing the spread between the preferred stock or debt(which has some degree of protection in a bankruptcy) and the common (which has ZERO protection. CNC is a great example which I am considering right now. Here is my plan: CNC preferred G is trading at 8.70 and has a diviidend yield of 25.57% at the moment. CNC is trading at 3.29. Both are near 52 week lows because of the fear that CNC will go bankrupt. If CNC truly does go bankrupt then the common will tank much faster than the preferred. My plan is to go long about 10K shares of the preferred and short about 20K shares of the common. Its a fairly market neutral approach but I lock in the dividend. If the company goes bankrupt, the common will tank faster and I will probably either make money or break even. If the bankruptcy issue goes away I will scale down my short and collect my massive dividend. Any thoughts?
I had a nice run with Armstrong (ACK) due to the asbestos litigation it was going through. It went down under a dollar and went back to the $3.00 range within a few months.
only one hitch there....if you are counting on that dividend for the profit (since it is a neutral position) then you have to ask yourself, why would a company pay a dividend when they are bankrupt or near bankrupt? If the board follows any logic whatsoever they would preserve cash rather than pay it out.
good point. However, preferred stock is more like debt than stock when it comes to dividends. I always read the term sheet to confirm this but usually the dividend is locked in and can't be disposed of unless the company is bankrupt. However, I will not play MCICP, for instance, (WCOM's preferred) because the dividend can be deferred for two years. I think during that time there is a reasonable chance that WCOM can go bankrupt. Even though I can lock in a spread by shorting WCOM by an appropriate ratio I don't like taking the risk that I can be in this for two years and end up with dead money all along.