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
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 |
$6.97 |
$1.18 |
491% |
|
A123 Systems |
$28.20 |
$6.32 |
446% |
|
Cirrus Logic |
$21.20 |
$4.51 |
370% |
|
Power-One |
$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.
