(This is an excerpt from an article I originally published on Seeking Alpha on January 22, 2012. Click here to read the entire piece.)
So Eastman Kodak (EKDKQ.PK) was rearranging chairs on the deck of the Titanic after all. Late Wednesday night (January 18), Kodak announced that it will file a voluntary bankruptcy using an 18-month, $950M debtor-in-possession credit facility from Citigroup (C) to help remain operational through through the restructuring process:
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This announcement arrived just a week after I jumped in and out of Kodak as part of a “bankruptcy trade.” This close call made me think further about the merits of trading or investing in companies that are flirting with disaster. As we have seen in other bankruptcy cases like AMR Corporation, management insisted almost to the very end that it was not seeking an escape through bankruptcy. The battle between rumor/news and management denials creates moments of abrupt, and often tradable, volatility in the stock.
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Lesson #1: never trust claims from management about the prospects of bankruptcy…unless it is admitting to the possibilities of such an outcome. {snip}
Lesson #2: Do not take the plunge until some catalyst has either cleared out enough sellers to provide some upside or positive news provides some ray of hope. {snip}…
…I never even thought about investing in companies on either side of bankruptcy until I read “You Can Be a Stock Market Genius: Uncover the Secret Hiding Places of Stock Market Profits
by Joel Greenblatt. It is a book with a cheesy title, but it is filled with intriguing non-conventional investment approaches to search for mispriced stocks. A chapter appropriately titled “Blood in the streets (Hopefully, Not Yours): Bankruptcy and Restructuring” includes the following solid premise:
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Greenblatt explains that after a bankruptcy process concludes, former creditors of the company typically get issued stock in the new company in lieu of much of the former debt. These banks, bondholders, and trade creditors are not interested in stock and will sell at the first opportunity, creating some initially low stock prices….{snip}
Be careful out there!
(This is an excerpt from an article I originally published on Seeking Alpha on January 22, 2012. Click here to read the entire piece.)
Full disclosure: no positions