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is there a "bankruptcy bounce"?

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June 10, 2009 – Comments (8)

I bought a few shares of CEM (Chemtura) which is now some insane pink sheet ticker, cemjq.pk i think. 

I bought it at 18 cents, 17 cents, 16 cetns and 12 cents, and then CEM declared bankruptcy.  I had alot of fun on the CEM yahoo  message board the day they declared BK as trading halted and nobody knew what was going on, speculation ran rampant, and all of that. 

The news then came out that they had delcared BK, and a whole new set of posters arrived on the scene.  One offered that his/her investment strategy was based on buying stocks in the days following bankruptcy and then selling them some time later after what he/she described as usually being a significant bounce.  Apparently, per this posters commentary, this "bankruptcy bounce" is extremely common.  This person said they put in an order for something like 250,000 shares in stages between $0.02 and $0.03.

CEMJQ.PK went to $0.02 within a couple days of the declaration...  And has since bounced as high as $0.37.  Thats very nearly a 20 bagger, and more than a 10 bagger on average for this mystery poster mentioned in the paragraph above.  I actually made money on CEM, after being down 80 some percent at the low.

I bought some shares of GGP for 60 and 36 cents earlier in the year, sold off enough sahres to basically just have the houses money left on the table when it bounced to $1.20 before the bankruptcy declaration.  After the bankruptcy declaration, GGWPQ.PK dropped to the 50 cent range and has since bounced well over $3.  I'm letting those shares ride for a while to see if Ackmans strategy works out, even though I suspect he makes out well and common shareholders have a decent chance of getting the shaft.

Pilgrims Pride (PGPDQ.PK) has been on a epic tear since the first days after its bankruptcy declaration.  It hit 14 cents in the days after BK was declared and has since gone on the ride of a lifetime, hitting nearly 7 bucks.  Thats a 50 bagger folks, better than many of us will ever do on any holding in our lives.

I am not really aware of all that many more companies that have gone bankrupt.  Lehman dropped to a nickel within days of BK and subsequently bounced to 30 cents, only to drop back to a nickel.   So your timing would ahve had to be good, but the "bankruptcy bounce" did occur.

Washington Mutual bounced from $0.02 to $0.10, but in the days just after bk it fell only to the $0.06-0.07 range, so thats not much of a bounce, but is a 50% return in under a year.

GM shares have staged quite a rally in bankruptcy, even though they are so clearly worthless.

Playing the bankruptcy bounce isn't really my style, and I don't know where to get a list of everybody thats going broke, but in an hour of digging around I can't find a bankruptcy stock that DIDN'T exhibit this pattern to some degree. 

Did my fine feathered mystery poster on the CEM board have a strategy with good historical odds?  Was he/she onto something?

Is there a bankruptcy bounce?

Checklisted minds are curious.

8 Comments – Post Your Own

#1) On June 10, 2009 at 5:15 PM, Seano67 (82.21) wrote:

This is what I'm talking about. Great post. It's extremely interesting. I'd have never even considered such a thing as a 'bankruptcy bounce', well beyond GM that is, which is an entirely different deal and a total wildcard as far as I'm concerned what with all the taxpayer assistance they'll be receiving, but now this is something else to consider. Pilgrims Pride, wow. I had no idea.

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#2) On June 10, 2009 at 5:35 PM, EV38 (99.78) wrote:

I remember a company awhile back called Slater Steel on the TSX. My memory is vague on it but I beleive the story was that it was bankrupt and set to be delisted on a Friday. On that Wednesday it closed at 15 cents. The Thursday it opened at 15 cents then continued to around 85 cents or so on volume of something like 3 or 4 times its share float. After market close it released a statement that it doesn't know why it went up that much and reiterated its bankruptcy and share delisting the next day. It open down like 90% and closed at a few pennies. If someone has a better memory than mine, let them retell the story.

If you want a company that is super duper dead bankrupt with literally nothing of value left as they sold off their only subsidiary with some value, check out Oilexco. OIL on the TSX, and its listed on pinksheets as well. Its trading at 7 cents right now and I am watching it for some signs of life.

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#3) On June 10, 2009 at 5:43 PM, usmilitiadude (31.68) wrote:

Very interesting, I need more sleep, not less. Someone on MF made reference to a "dead cat bounce", which is hilarious to me.

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#4) On June 10, 2009 at 5:47 PM, checklist34 (99.72) wrote:

Sean, I agree its fascinating.  In CEMs case I tend to think that the common will ultimately be worthless, just cancelled.  In the Pilgrims Pride case I assume that it will ultimately be worth something or it wouldn't ahve gone this high.

The mechanism, if such a phenomenon actually exists, might be something like this:

in the days after the BK declaration the shares are sold by many parties.  Speculators gambling against bankruptcy accept loss and sell them.  It may well be that alot of funds cannot hold shares of companies that are in BK and sell them.  So a massive wave of selling hits.

After that who knows what would cause the bounce?  Speculators buying in bankruptcy, and then more speculators piling on when the sahres bounce a little wondering if someone knows something.  Shorts covering their positions. 

Who knows waht would casue the bounce.  But per the speculator(s) that arrived on the message boards after the Chemtura bankruptcy, this is quite common and quite often profitable.  Chemtura is a 15 bagger+, Pilgrims Pride is a 40 bagger +, etc, etc, etc. 

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#5) On June 10, 2009 at 5:54 PM, checklist34 (99.72) wrote:

EV, thats wild, I'll have to look into it.  All I can think of to cause that is short covering causing a bounce that in turn fuels speculative buying.  ???

Militia, I too enjoy the saying "dead cat bounce".  "if you drop a dead cat from high enough it'll bounce a little bit, evne though its still dead".  lol

But one way or another, and with almost no fanfare, pilgrims pride, in bankruptcy, is by far teh highest return stock on the market in the last 8 months.  who'd have thunk it?

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#6) On June 10, 2009 at 9:43 PM, EV38 (99.78) wrote:

http://cxa.marketwatch.com/TSX/en/Market/pricehistory.aspx?symb=SSI&sid=49253

 

hah I knew my story wasn't exactly right. It took them a couple of days to get from 15 to 80 cents on the Thursday, but still pretty impressive. And they didn't delist that very Friday, but the Friday after.  Still for a 5 year old story I hink getting it half right is quite good!

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#7) On June 10, 2009 at 10:11 PM, EV38 (99.78) wrote:

I'll add one more comment that is semi-related to this. I dunno if this is urban legend or not but 2 different guys who were far more versed in garbage TSX penny stocks seemed to remember a stock that one time hit -.005 on the TSX. That's right, someone would PAY you to take the shares off their hands. Apparently the story behind it was that institutions wanted to get it off their books before the quarter ended and they had to report that they held such an embarassing position. Don't know the length of time it supposedly traded at -.005 but I suppose this would be possible in the days of higher commissions where I guess the -.005 is just compensation to cover the buyer's commissions.

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#8) On June 12, 2009 at 1:41 AM, checklist34 (99.72) wrote:

EV, that is awesome.  I'll add it to my list of "bankruptcy bounces".

And on your second post about the -0.05 stock, that is UNBELIEVABLY AWESOME, JUST UNBELIEVABLY.

I am willing to be paid to take any stock.  Hyper bears listen up, I will take any stock you own from you for just -0.01 cents per share, thats right for just 1 cent I will take 100 shares of anything from you. 

:)

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