However, investors should reconsider whether they think it may be time to bargain on the shares of bankrupt companies. after all, hertz (HTZ)
with JCPenney (JCP)
It was already struggling before the arrival of the coronavirus.
Of course, there is such a company General Motors (General Motors)
as well as delta (DAL)
, American (AAL)
After going bankrupt in the past few years, several other bankrupt companies liquidated their balance sheets and eventually got a second life from investors. But this was after those investors who held shares of old bankrupt companies were eliminated.
When getting paid in the reorganization of Chapter 11, shareholders are the lowest on the totem pole. The company’s creditors (including everyone from bondholders to suppliers) enjoy higher priority.
In addition, a company seeking bankruptcy protection may do so because of poor business decisions or no longer relevant to consumers. This is not just a growing debt burden.
Bankruptcy can only temporarily solve the company’s problems
take a look Pier 1 (PIRRQ)
. The long-struggling retailer filed for bankruptcy in February and plans to permanently close all 541 stores. On the date of filing, Pier 1’s stock price plunged 75% to slightly above $ 1 per share. They are now trading at less than 7 cents.
And ask any Stuck in sears
Since the submission of Chapter 11 in October 2018, how to resolve bankruptcy.
At the time of filing for bankruptcy protection, the company’s stock price was about 41 cents. After appearing from Chapter 11 in February 2019, the stock price surged to $ 2.77 per share. But the stock has fallen nearly 60% in the past year to about 17 cents.
Even after exiting from Chapter 11, even newly issued shares of previously bankrupt companies are often difficult to prosper. After all, a healthier balance sheet does not mean that the company has a better business model-especially in the infamous retail industry.
American Apparel, Fairway, Barneys, and RadioShack are just a few examples of what are known as Chapter 22 companies. These companies were forced to file for bankruptcy for the second time within a few years after standing out from the previous reorganization.
Then came Eastman Kodak, a photography and film company, a former technology and consumer giant. From 1930 to 2004, it was a component of the Dow Jones Index. It took a long time to start digital photography revolution.
It filed for bankruptcy in 2011 and erased the value of shareholders. Although the makeover Eastman Kodak (Kodak)
He returned to Wall Street with new stock in 2013, and since then the stock price has fallen by 90%.
Therefore, although active traders may have sufficient funds and appetite to try to take advantage of short-term volatility advantages of bankrupt stocks such as Hertz and JCPenney, long-term investors should think twice.