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Why Shares of LATAM Airlines Are Up Today

By Lou Whiteman – Updated Jun 5, 2020 at 12:15PM

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Investors need to be careful buying into this rally.

What happened

Shares of LATAM Airlines Group (NYSE: LTM) soared 22% on Friday morning, before falling back somewhat, on encouraging news about a potential post-COVID-19 travel recovery. But not all airline stocks are the same, and investors should avoid buying into the rally in LATAM shares.

So what

Airlines have been hit hard by the pandemic, which has caused travel demand to plummet and left carriers scrambling to avoid failures. LATAM in particular has been hard hit, with the airline filing for bankruptcy protection late last month.

A plane landing at night.

Image source: Getty Images.

Investors are buying into airline shares on Friday thanks to encouraging signs that the worst of the pandemic might finally be behind us. If so, that certainly would be good news for the sector in general and for LATAM, too. But in the case of LATAM, it is likely too late for shareholders to share in the spoils of a recovery.

LATAM hopes to use bankruptcy to restructure its debts and emerge as a viable carrier; shareholders are unlikely to be so lucky. In bankruptcy, equity is at the back of the line, and given LATAM's massive debt load and operational issues, it is hard to imagine there will be anything left for shareholders when the process is complete.

Assuming LATAM does emerge from bankruptcy, it will likely be owned by its creditors.

Now what

There has been a lot of questionable speculation about the stock on social media. While LATAM filed for bankruptcy, its subsidiaries in Brazil and elsewhere did not file, but investors should note that unsecured creditors will have access to those assets before shareholders.

A better measure of the health of LATAM, and the prospects for an equity recovery, is to look at the debt. Its unsecured debt currently trades at less than 20% of its face value, an indication that those in line ahead of equity holders do not expect to be made whole.

Shares of bankrupt companies tend to be volatile, and traders can make (or lose) significant sums by trying to ride the momentum up and down. That's a risky game, and not investing. Long-term holders should avoid these shares.

Lou Whiteman has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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