This Stock Is Going to Zero, and You Know It

You may have seen fellow Fool Chuck Saletta explaining why Motors Liquidation Company carries absolutely no value for investors, even if you ask the company's own management: "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 BB: BLOKA.PK) is in the same position. Blockbuster has filed for bankruptcy protection. The company is up to its eyeballs in debt; the bankruptcy plan will reduce $1 billion of senior debt to less than $100 million but also gives Blockbuster's equity to the firms issuing the debt to begin with. The market cap, for comparison purposes, stands at about $12 million today. That's about $12 million too high. Blockbuster's own press release will tell you so: "Under the proposed plan, there would be no recovery by the holders of the Company's outstanding subordinated debt, preferred stock or common stock."

That's right -- you, the common shareholder, gets nothing.

Zero, zilch, nada, nothing!
Businesses going through bankruptcy are worth nothing to us common investors. If anybody gets paid at all, that 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, that 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 Jim 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  ) . Attempts to copy the Netflix model have failed, and the bricks-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 with absolutely no upside. 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 need more evidence, take a look at these insane market value swings:

Company

52-Week High

52-Week Low

Top-to-Bottom Difference

SandRidge Energy (NYSE: SD  )

$14.08

$3.87

264%

STEC (Nasdaq: STEC  )

$32.34

$9.47

241%

Oclaro (Nasdaq: OCLR  )

$15.99

$5.10

214%

Weyerhaeuser (NYSE: WY  )

$53.69

$15.06

256%

Source: Yahoo! Finance.

Of these, Weyerhaeuser paid a special dividend of $26.46 per share earlier this summer. The paper producer is becoming a REIT and had to make a big payout, but the underlying cash flows are of questionable quality. Oclaro is riding a wave of investment in optical networking infrastructure, and the stock chart tells the tale. The solid-state revolution hasn't quite happened yet, leaving STEC high and dry. Likewise, SandRidge is waiting for a turnaround in the natural gas market while nursing a wounded balance sheet. Some of these stocks are going up; others way 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? One 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. True to its name, The Motley Fool is made up of a motley assortment of writers and analysts, each with a unique perspective; sometimes we agree, sometimes we disagree, but we all believe in the power of learning from each other through our Foolish community. 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.


Read/Post Comments (15) | Recommend This Article (106)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On September 23, 2010, at 2:40 PM, MonicaPell wrote:

    Thanks Gekko. There goes another one from my port.

  • Report this Comment On September 23, 2010, at 4:18 PM, TMFZahrim wrote:

    Not completely surprising? I'd like to point out that this was obvious to The Onion four years ago:

    http://is.gd/foI3e

    Anders

  • Report this Comment On September 23, 2010, at 5:12 PM, pls52 wrote:

    I understand completely what the value of ZERO is having been caught off guard with Enron and World Com. Tough lesson but I will never forget it.

  • Report this Comment On September 24, 2010, at 1:06 AM, ecloud wrote:

    Sounds like a good stock to short then.

  • Report this Comment On September 24, 2010, at 11:41 AM, caltex1nomad wrote:

    Here is something odd ! My local Safeway just replaced the Redbox with a Blockbuster Vending machine.....Go Figure ! Long live Netflix and Instant Streaming.

  • Report this Comment On September 24, 2010, at 2:15 PM, plange01 wrote:

    motors liquidation stock is worth as much as the new garbage gm is trying to dump on any fool willing to buy it!this is one to walk away from any let this disgrace of a company close for good!

  • Report this Comment On September 24, 2010, at 2:19 PM, Mobywhite wrote:

    The Fools writting is in general so bad I don't understand why you continue to do it.

    As usual, information contained in this article is wrong. Sandridge with the forest and arena oil purchases is 84% oil. NG prices increasing would help 16% of their revenue. They are "waiting for a turnaround in the natural gas market".

    I'd think by the fact that they went out and purchased one company (arena) and oil assets of another (forest) that they are not waiting for anything.

    I wish you fools would stop writing this rubbish you are litterally clogging the news services with garbage.

  • Report this Comment On October 01, 2010, at 12:55 PM, jclams wrote:

    Add WAMU to my list of moneymakers that was once an investment for life turned zero. When it paused at $20 on its way down, and the analysists recommened buying, which I didn't, I should have known the end was coming. $20 is still more than zero.

  • Report this Comment On October 01, 2010, at 1:27 PM, megastockmaster wrote:

    Keyes tried to save Blockbuster by selling pickles -- no kidding -- , selling two liter soft drinks, selling other merchandise. The Slurpee king was excellent for 7-11 but totally the wrong choice for peddling media. Like a finger trap toy, the more entangled in b&m and physical merchandise he got, the more he tugged at it.

    The proof of his wrongness for this company is in the stock price and his legacy will be a BK which wipes out the common shareholders he was appointed to defend.

  • Report this Comment On October 01, 2010, at 1:30 PM, megastockmaster wrote:

    To add to the finger trap analogy: who could take Keyes seriously after the comical failed bid to _buy_ Circuit City while Blockbuster was entering its own death throes?

  • Report this Comment On October 01, 2010, at 2:13 PM, ziq wrote:

    No regrets for having ignored the nattering nabobs and stayed with NFLX. On the contrary, my only regret is selling off some to stay balanced and diversified as it kept going up.

  • Report this Comment On October 01, 2010, at 2:50 PM, compwx wrote:

    There is one legitimate reason to buy stock in a bankrupt company that writers for the Fool seem to forget. If you are already short the stock, you probably don't want to wait for your broker to write down the stock as worthless to free up your margin requirement. In a case like this, it makes sense to give the poor sap who still owns the stock a few pennies on the dollar so that you can close your position before the stock is delisted, instead of waiting a few years for bankruptcy proceedings to finish.

  • Report this Comment On October 01, 2010, at 3:26 PM, EarlBerger wrote:

    I am not sure how a stock falls 264%. Do you mean that the current price of the stock would have to increase by 264% to reach its previous 52-week high?

  • Report this Comment On October 01, 2010, at 6:01 PM, thomasaw wrote:

    EarlBerger: Stock price percent changes are based on the last price. So, if the price of Sandridge stock changed from $14.08 to $3.87 that's a change of $10.21 which is 264% of the lowest price of $3.87.

  • Report this Comment On October 02, 2010, at 2:53 AM, LemonMeister wrote:

    Blockbuster was doomed a couple of years ago. Netflix relies on the couch potato society. Muck like investors who want money for nothing. The redbox is doomed also, couch potatos don't like to get off the couch. Where is the next streaming media investment share to be had. Even Netflix streaming is far from perfect at this point because the major bandwidth providers are fighting over giving us the speed we need. That's why were 4 or more years behind Korea and the rest of the world . I'll just go back on my couch now http://www.akbhomesucks.com too much electrical interference from bad wiring to stream from netflix.

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