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:


52-Week High

52-Week Low

Top-to-Bottom Difference

SandRidge Energy (NYSE: SD)




STEC (Nasdaq: STEC)




Oclaro (Nasdaq: OCLR)




Weyerhaeuser (NYSE: WY)




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.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.