Please ensure Javascript is enabled for purposes of website accessibility

Why Shares of LATAM Airlines Are Up Today

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

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

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.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
356%
 
S&P 500 Returns
118%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 11/28/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.