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Speculating VS. Investing.



June 28, 2011 – Comments (5) | RELATED TICKERS: YRCW , ESLRQ.DL

Evergreen Solar, Inc and YRCW are wrestling to stay out of bankruptcy yet ESLR's stock price rose 20% yesterday on a whim and YRCW's stock price rose 2.5X over the last four days, both apparently on a whim???   

More speculators than investors out there now adays, especially in an up market.  Speculators cause bounces, which causes day traders to jump in, which causes computer programs to kick in, which causes shorts to cover, which causes the stock price to rise, which causes the speculators to pile on and then we get a cycle while everyone scratches their heads and we find out who loses the musical chairs game again and falls on the floor holding the bag.  (Meanwhile Shorts pile back on and some daytraders have steak for dinner).

Evergreen Solar has shut down MFG in Massachusetts. They owe Massachusetts for their missed promises that they collected the incentives for.  Evergreen Solar has warned that any refinancing, if they can do so, will strongly dilute stockholders.

Likewise YRCW was a 2.5 Bagger in four days, rising from $0.60 to $1.60 yesterday, before retreating back to $1.14 today. YRCW actually has a lot of assets and after renegotiating with the Unions I actually thought they may have had a chance.  $4.3 Billion in sales and a $75 Million market cap is fairly tempting and I can see where it bears some investigation. The bottomline, however is that YRCW continued to signal that it is unlikely to dig its way out.  

Part of the agreement with unions and bondholders ended up being dilution to the point that stockholders had only a few percent, at best, of any equity left.  Losses continue to mount and YRCW has a net negative stockholder equity of $285 Million. With bankruptcy still possible and a negative book value and only 2.5% of the shares left in stockholders hands, a 2.5X 4 day rise in share price should not have occurred.  

Some equities facing bankruptcy get new financing as investors/banks, etc, don't want to own the company by foreclosing and they balance their risk reward between letting a company run or taking what is left.  Regardless to how it plays out, the shareholders have nothing left.  A few company's with decent assets have survived and help fuel the speculators, (GGP, Pilgrim's Pride, etc).  Finding company's where the assets can be realigned and their is sufficient equity for the stockholders is rare and neither of these two plays appears to have the attributes, although YRCW might have a year ago if someone didn't dig all the way into the books.

Speculation is one reason that we don't have an efficient market, and it is only getting worse. Evergreen Solar, Inc and YRCW are  wrestling to stay out of bankruptcy yet their stock prices dramatically change the market cap in a few short trading hours. 

If you decide to participate in these moves then don't be surprised if you're the one left without a chair and sorely limited ass-ets.

5 Comments – Post Your Own

#1) On June 28, 2011 at 9:25 PM, TMFBlacknGold (91.08) wrote:

The Great Bogle would be singing your praises right now! Speculating allows nothing good to happen. Investing allows you to retire.

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#2) On June 28, 2011 at 11:54 PM, BuffettJunior1 (97.72) wrote:

YRCW will never dig itself out of bankruptcy. It's a very capital intensive company and has too much debt. It cant even produce enough excess cash to pay its interest expense, so how do you expect it to survive much longer?

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#3) On June 29, 2011 at 2:12 AM, TMFUltraLong (99.38) wrote:


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#4) On June 29, 2011 at 9:36 AM, TSIF (99.98) wrote:

Good detail on YRCW Sean, thanks!

BuffetJunior1, YRCW is not in bankruptcy. the issue becomes that even if it avoids bankruptcy, does it have any value left. I think we all agree that it doesn't! 

BlacknGold, maybe we can't retire at 50 like some of the Greek Populace that is currently rioting, but any relief from worrying about finances and not depending on the government is a good thing!  Too much speculating can result in not only depending on the government for retirement, but for handouts as well.  Thanks!

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#5) On June 29, 2011 at 11:16 AM, BuffettJunior1 (97.72) wrote:

This company will go bankrupt is what I was trying to say. I don't give it more than 5 years. Its just not producing enough excess cash to survive very long. Its burning through cash, not very good for a capital intensive company like this. Only a slight rise in gas prices or interest rates and this company will be hurt even worse.

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