Post-bankruptcy stocks are often undervalued because they are usually ignored by mainstream investors who perceive them (often wrongly) as being of poor quality and very risky. These investors remember the bad things that happened to the company to force it into bankruptcy. What they don't understand is that many companies take advantage of Chapter 11 to reshape their businesses and balance sheets so that they emerge as very strong competitors. As a result, post-bankruptcy stocks can provide good returns to savvy investors who are not swayed by their past history but focus on the future prospects.
After recently introducing the Post-Bankruptcy Stock IndexTM (PBSI), several value investors have asked me how they can best use the Index to uncover potential stock profit. I created the PBSI with three objectives. First, I wanted to show that at least over certain time periods, post-bankruptcy stocks can significantly outperform more mainstream stocks. The PBSI is already proving this point quite effectively. Over the past 12 months, the PBSI has gained 40.7% compared to 16.9% for the S&P 500. It is also worth noting that the 12 post-reorganization stocks highlighted when I last wrote about this area in September 2011 have gained an average of 73% compared to 38% for the S&P 500 over the same time period.
Second, I wanted to highlight some of the more actively traded post-bankruptcy stocks for investors who want to add some post-bankruptcy opportunities to their portfolio. Finally, I thought that the Index could provide a useful gauge as to whether post-bankruptcy stocks were more in favor than usual or more out of favor than usual at any given time.
While the PBSI shows that post-bankruptcy stocks have outperformed over the past year, they have only performed more or less in line with the broader stock market over the past several months and have actually underperformed the NASDAQ Index over the last 3 months (PBSI +7.1% vs. NASDAQ +10.8%). That suggests that while this may not be the absolute best time to buy post-bankruptcy stocks, it's not a bad time either.
The companies discussed below all emerged from Chapter 11 over the last several years and look to me as though they are still undervalued. These five are all components of the PBSI. Following the chart, I also offer a few thoughts on a very prominent name that recently emerged from Chapter 11 and whose post-reorganization stock is likely to begin trading soon.
General Motors (GM), one of the world's largest automakers, went through a government assisted bankruptcy in 2009. The company used its sojourn in Chapter 11 to modify labor contracts, rationalize operations and restructure its balance sheet. As a result, the reorganized GM is a much stronger global competitor. I expect auto sales to continue to rebound and GM's stock to follow suit.
General Growth Properties (GGP) became the largest real-estate bankruptcy in history in early 2009 when it was unable to support its massive debt load. With a new CEO and board of directors it emerged from court protection in November 2010 as two companies, General Growth, a REIT, and Howard Hughes Corp. (HHC) which focuses on master planned communities. Today, General Growth's portfolio consists of 123 retail properties, many of them in premier locations. I expect both its asset value and its dividend to rise.
Lear (LEA), one of the world's largest automotive parts manufacturers, had little choice but to follow some of its major customers, including GM and Chrysler, into bankruptcy in 2009. Lear used a relatively short "prepackaged" bankruptcy to strengthen its balance sheet by converting $3.6 billion of debt into equity. I recommended Lear's stock back in June 2010, and then after it rose 83%, I recommended selling to take profits this past June. As the company's results continue to strengthen, I still think the stock represents good value. Moreover, it recently received a favorable write-up in Barron's, the venerable investing journal.
Tronox (TROX) is the world's largest fully integrated producer of titanium ore and titanium dioxide; its products are key inputs to a range of products from paints to ceramics. The company was spun off from Kerr-McGee in 2006, but its former parent saddled it with significant environmental liabilities that contributed to a bankruptcy filing in early 2009. The titanium industry tends to be very cyclical, and when the sector moves up, Tronox stock could soar.
Chemtura (CHMT), with roots back to the 1840's, is a global maker of specialty chemicals. It was another casualty of the 2008-09 recession, filing for bankruptcy in March 2009. The company spent more than 19 months in Chapter 11 working to realign its operational structure and reduce debt. While sales have been a little weak in recent quarters, Chemtura should benefit as the U.S. economy gradually strengthens.
Bankruptcy: A Road to a Second Chance
Market Cap. Mil.
Price To Sales
Debt to Equity
General Growth Properties
The last name that I want to mention is Eastman Kodak, whose post-bankruptcy stock should begin actively trading soon. While Kodak is still one of the most widely-recognized brands in America, it has largely abandoned the photo products market in favor of commercial printing. I do have concerns about Kodak's management. As a result, I recommend watching the company's performance for several quarters before considering an investment.