After filing chapter 11 bankruptcy on Tuesday November 29, AMR Corp (AMR) common stock plunged from $1.62 to $0.26. Since Tuesday, AMR has staged a significant move higher back to close the week at $0.38. This move from $0.26 to $0.38 presents an excellent opportunity for stockholders to sell before AMR goes to 0.
If AMR stock is worthless then why is it trading at $0.38? One reason why AMR stock is not at 0 is because it was a very heavily shorted stock prior to the bankruptcy filing. Market participants who shorted AMR stock must buy the stock back to cover their shorts. This short covering game can go on for some time, but in the end the stock will go to 0. As an example of how stocks trade post bankruptcy, let's consider the old GM (NYSE:GM) stock. After the bankruptcy, GM stock hovered between 20 cents and 80 cents for a period of many moths before ultimately becoming worthless. The same could very well happen with AMR.
What could cause AMR stock to rally? In the case of chapter 11 bankruptcy, it is very unlikely for stock holders to ever see a gain, but there are a few obscure possible outcomes that could benefit stock holders. One possible positive for the stock could be some sort of buy-out of AMR by another airline possibly U.S Air (LCC), or a foreign carrier. I do not see this as a real possibility because if there was a deal to be made, AMR would have made it. Perhaps AMR end up merging with another airline after bankruptcy, but this would not help AMR stock holders.
If one still believes that somehow there is value in AMR, then investors should buy the AMR preferred stock (NYSE:AAR) or junior AMR bonds that are trading at pennies on the dollar. If there is any positive outcome here, then the preferred shareholders and junior bond holders would have a slight chance of making out with something.
Though it seems like there is little left for investors to lose with AMR at $0.38, investors will likely lose 100% of anything they have remaining. Investors who owned AMR were flat out wrong, and should take the $0.38 while they have the chance. If you are bullish about AMR in the long term, then wait until the new stock is issued and buy it then. AMR stock now is nothing more than worthless paper.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.