Chart Review: Opportunities in Bankruptcy Panics In Eastman Kodak and AMR

Now that the stock market is in bear market territory and the ECRI has pronounced the U.S. (and indeed the world) is at the edge of another recession, we should expect to see a rapid increase in rumors of company bankruptcies. Many times, the stock market’s instant reaction to sell first and ask questions later will deliver a golden opportunity to buy companies on the cheap. At a minimum, these trades can offer decent profits after the dust settles a bit, company denials surface, and, in the best case, the rumors prove completely false (likely generated by folks interested in seeing prices go much lower). Back in March, 2009, bankruptcy fears drove many companies to single digit stock prices and within a year many of them returned many multiples on the upside.

Over the past week, two long-suffering companies – Eastman Kodak (EK) and AMR Corporation (AMR), also known as American Airlines – have experienced the roller coaster ride of bankruptcy rumors. I post these charts as examples of what can happen in the wake of the turmoil following bankruptcy rumors.

Last Friday, Eastman Kodak got caught in the bankruptcy rumor mill because the company is buckling under massive debts and continued operating losses. Sales of its patent portfolio have barely kept the company alive (see “Kodak shares plunge as bankruptcy fears escalate“). The stock closed down 54% after dropping to as low as 54 cents per share. On Friday evening, the company issued a quick press release insisting that it is not filing for bankruptcy. The stock soared 43% in after-hours trading and by Monday’s close, EK was up 72%. At one point, it had recovered ALL of Friday’s losses. I regrettably missed my opportunity on this trade. (The charts below include the first 30 minutes of trading Tuesday.)

Eastman Kodak plunges
Eastman Kodak plunges

Yesterday, American Airlines (AMR) was hit by the rumor bug and the stock was halted twice during the day. I decided to buy some stock on the first plunge and tried unsuccessfully to buy calls on the cheap at the bottom of the second plunge. Implied volatility increased rapidly after AMR issued a quick denial of the bankruptcy rumors. For more details, see “American Airlines stock sinks on bankruptcy fears.”

AMR is a particular risky “anti-bankruptcy play” because major airlines have sunk into or close to bankruptcy twice in the past 10 years. If the economy continues to sink, I will not be surprised to see at least one of the major carriers finally completely buckle under the pressure – with no government bailout or generous creditors in bankruptcy court available to scare up a third revival.

At the time of writing, AMR has managed a 14% bounce after losing 33% yesterday. I am showing the monthly chart to emphasize the roller coaster ride AMR has traveled the past 10 years. Clearly, there is tremendous upside potential here if AMR does indeed avoid bankruptcy. AMR is now trading around its March, 2009 lows.

AMR's roller coaster ride over the years
AMR's roller coaster ride over the years

Source for all charts:

Be careful out there!

Full disclosure: long AMR

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