You may have seen fellow Fool Chuck Saletta explaining why Motors Liquidation Company carried 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." Movie maven Blockbuster followed suit with its own bankruptcy filing in September.
Now grocery chain operator Great Atlantic & Pacific Tea (OTC BB: GAPTQ) is in the same sinking boat. A&P has filed for bankruptcy. The company is up to its eyeballs in debt, and rushed into bankruptcy to avoid an interest payment due on Wednesday. The company has shown a cool $1 billion in negative earnings over the last year, and the balance sheet held just $94 million in cash, but $1 billion of long-term debt three months ago. Chances are, the bank accounts look even worse now.
The market cap, for comparison purposes, stands at about $26 million today. That's about $26 million too high. A&P's press release offers plenty of soothing words for its customers and employees but absolutely none for shareholders. And that's the way these affairs go: You, the common shareholder, get nothing.
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 common stock will be written off and worth nothing.
If A&P 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.
Crazy but it's true
Yet people still trade A&P stock in spite of all the risks with virtually 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 2% move when you're starting from $0.50 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 can go completely bonkers in the short term. The fact that A&P shares are actively trading hands even after the bankruptcy was announced 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 |
|---|---|---|---|
|
Cirrus Logic |
$21.20 | $6.23 | 240% |
|
A123 Systems |
$23.46 | $6.32 | 271% |
|
PMI Group |
$7.75 | $1.94 | 299% |
|
JinkoSolar Holding |
$41.75 | $8.23 | 407% |
Source: Yahoo! Finance.
Some of these stocks are going up; others way down. Cirrus Logic is riding the coattails of Apple
A123 started the year riding high on the promise of electric cars, but the battery maker has failed to turn that promise into real profit. Mortgage insurer PMI jumped sky-high in April when the government extended its own mortgage modification program, but the gains didn't last. And JinkoSolar is just one of the most extreme bouncers in a solar industry whose road was full of potholes this year -- LDK Solar
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.
The market is packed with hidden dangers, but investing doesn't have to be a risky business. You can get your hands on a free report right now that details five stocks so attractive that The Fool put its own cash into buying them -- and you should, too.
