The Business Insider recently posted a list of 10 big companies veering towards bankruptcy. Not surprisingly consumer discretionary companies dominate the list. Without a doubt, all of these companies have serious problems. Should you go out and short these companies? No. Absolutely not.
I'm not saying that none of these companies will file for bankruptcy, but I suspect that more will avoid that fate than suffer it. I think that a lot of these companies would make solid takeover targets. I'm pretty sure that someone would want to buy Sprint-Nextel or Interpublic Group. These companies have large customer bases and brands that have real value. While someone could let them fall into bankruptcy and then harvest the good organs, I think that doing that would cause undue harm to the brand.
So should you do with a list like this? I recommend that you use it as an opportunity to learn more about why businesses rise and fall. Try to find out what you could have noticed months ago and would've allowed you to short the stock months ago. You can also use lists like this to find good companies. Find out who these companies' competitors are. Maybe they've taken market share from the companies teetering on the brink of bankruptcy. They might be good investments.
A more speculative approach would be to examine each company and determine which one would most likely survive and then go long. The stock is probably trading at or near its 52-week low. Don't commit too much of your capital to the position, after all, this company might go bankrupt.
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3 comments:
Well, purchasing stocks near bankruptcy is risky, but it can handsomely pay off if they manage to survive.
On the other side, stocks from already bankrupt companies aren't completely worthless as one may think. OK, the most likely scenario is that, from a ownership perspective, should the company emerge from bankruptcy it will cancel their old stock and issue new one. However, as slot machine plays they're the ultimate. In some rare cases, they can deliver obscene profits to those "stupid" gamblers willing to put $500 or $1000 on them. As a example, look at Vermillion Inc (VRMLQ): $0.01-$11.75 in a few months. Is that a worthless stock? If so, I want worthless stocks like that :)
I agree that investing in bankrupt stocks can be extremely profitable. However, most investors don't have the technical skill (intimate knowledge of bankruptcy laws or capital structures) in order to consistently make money this way.
Oh my God!!! Vermillion is out of control! Up to $16.50 for now O_o'
So much for bankruptcy plays.
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