This Stock Is Going to Zero, and You Know It

You may have seen fellow Fool Chuck Saletta explaining why Motors Liquidation Co. carries absolutely no value for investors, even if you ask the company's own management. Saletta explains: "As its name implies, the liquidation company is being shepherded through bankruptcy liquidation, and its shares are completely worthless. To be clear: Its fair value is $0.00, not a penny more."

Now former movie-night maven Blockbuster (OTC: BLOKA.PK) is in the same position. Blockbuster CEO Jim Keyes has been seen in Hollywood with financial advisors and debtors in tow, allegedly to hammer out a preplanned bankruptcy plan. The company is up to its eyeballs in debt, to the tune of more than $920 million, which pumps up the company's enterprise value to $900 million. The market cap, for comparison purposes, stands at about $13 million today. If the bankruptcy report is anywhere near the truth, that's about $13 million too high.

Zero, zilch, nada, nothing!
Businesses going through bankruptcy are worth nothing to us common investors. If anybody gets paid at all, it would be senior bondholders, lease landlords, and others with a contractual pipeline into the poor company's pocketbook. Your shares will be written off and worth nothing.

If Blockbuster ever comes back to the open market, it would probably be under a whole new batch of stock certificates that have nothing to do with the papers you hold today. Best-case scenario: You'll get replacement shares worth a small fraction of their original value. It'll take the mother of all turnarounds to generate a positive return after a conversion like that.

If anybody could do it, I would have put my money on 7-Eleven savior Keyes -- nobody knows retail like this man, after all. But Keyes has tried and failed at making Blockbuster relevant to consumers in the age of digital streams from Netflix (Nasdaq: NFLX  ) and super-convenient Redbox rental machines by Coinstar (Nasdaq: CSTR  ) . Blockbuster's attempts to copy the Netflix model have failed, and the brick-and-mortar stores aren't pulling their weight anymore. The jury is still out on Blockbuster's new Redbox-style vending machines -- but if that's Blockbuster's saving grace, it won't deliver until the coming Chapter 11 reorganization is but a distant memory.

Crazy, but it's true
Yet people still trade Blockbuster stock in spite of all the risks. Day traders can luck out and make a buck here and there as share prices gyrate through wild swings -- a price change of a single penny is a 12.5% move when you're starting from $0.08 per share. But even those hustlers will be left holding an empty bag when the bankruptcy filing comes.

To quote Chuck again, there's really only one logical explanation for this madness: "The market is nuts."

Here's the pudding
The long-term weighing machine that is the market goes completely bonkers in the short term. The fact that Blockbuster shares are actively trading hands even after the near-certainty of bankruptcy was revealed is just another data point to prove that maxim. And if you still need more evidence, take a look at these insane market value swings:

Company

52-Week High

52-Week Low

Top-to-Bottom Difference

Strategic Hotels & Resorts (NYSE: BEE  )

$6.97

$1.18

491%

A123 Systems (Nasdaq: AONE  )

$28.20

$6.32

446%

Cirrus Logic (Nasdaq: CRUS  )

$21.20

$4.51

370%

Power-One (Nasdaq: PWER  )

$13.04

$1.19

996%

Source: Yahoo! Finance.

Of these, Cirrus Logic and Power-One are on generally upward trends for what looks like good reason; A123 is burning cash at a tremendous rate and getting punished by Mr. Market accordingly; Strategic Hotels can't quite decide whether it's up or down. What they all have in common is drastic changes in the value of their businesses -- sometimes real and sometimes perceived. In a completely rational market, these sudden swings wouldn't exist.

Our 11 O'Clock Stock series recommends timely picks for today's market, often capitalizing on these crazy valuation misses. If it were possible to sell Blockbuster short, the stock could have shown up as today's selection -- but the stock is too far gone to be eligible for that most certain 100% return play. Why not go check out the more realistic selections we have on tap for you instead? A recent recommendation is a short sale you can actually make.

Fool contributor Anders Bylund holds no position in any of the companies discussed here. Netflix is a Motley Fool Stock Advisor recommendation. Try any of our Foolish newsletter services free for 30 days. You can check out Anders' holdings and a concise bio if you like, and The Motley Fool is investors writing for investors.


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  • Report this Comment On August 30, 2010, at 7:34 PM, GreeneWK wrote:

    The problem with Motors Liquidation Co. stock is that its value has not been officially set to zero, so those who hold this stock from the past cannot take a loss on their income tax.

    The statement by management that the stock is worthless may be true, but it is not proof to the IRS.

  • Report this Comment On August 30, 2010, at 9:12 PM, JustMee01 wrote:

    Greene,

    One can still sell it and take the loss. You don't have to wait for it to be formally retired. If someone will buy the trash, then why not sell it and be done with it? I don't think that's the issue. I think it's some speculation on day moves, and some inability to acquire new short positions, coupled to shorts closing out their old positions by snatching any shares they can find. Add in a few people that are clearly clueless and think it's actually new GM, and you get a dead cat bounce.

  • Report this Comment On August 31, 2010, at 10:25 AM, rbnmrzn wrote:

    Did you notice how skillfully The Motley Fool team places its comments on Cirrus Logic stock recently? Though saying nothing negative about Cirrus logic itself but mentioning CRUS stock time after time inside the articles with very negative titles they are forcing you to think that the company’s fundamentals are really bad. Great job guys and great understanding of human psychology!

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