The way to make money in the stock market is go where others aren't. It's easier to win when you have fewer competitors. One place you can find yourself alone is the Island of Post-Bankruptcy Companies. Companies emerging from bankruptcy emit an odor of failure. Investors stay away or, if they care at all, they take the wait-and-see approach, which almost always means they wait-and-pay-too-much.
Yet the very purpose of bankruptcy is to shave off the debt that usually killed the company in the first place. Companies post-bankruptcy are stronger than before. Upside comes with less risk, and your odds of success increase.
So here's how to be sneaky and smart. How to land first, explore the island, take your pick of the best, and leave with the treasure before others arrive. Even though some very savvy large investors have bought these stocks, the market still thinks these four ideas are horrible. You can get there first to profit before the market changes its mind.
Mall-owner-operator General Growth Properties
With debt reduced -- not a lot, but definitely enough for a fighting chance -- General Growth can manage quite well even with struggling tenants and less foot traffic. There are no guarantees. Any CEO can still wake up with fewer brain cells, decide to borrow billions of dollars the company can't pay, and find that no one shops anymore. But General Growth today offers the investor very good odds of, well, general growth in profits.
Better yet, it's a real estate investment trust that's required to pay out 90% of its funds from operations to investors, so you can depend on dividends as the cash grows. With a $0.10 quarterly dividend, the stock offers a 3.1% yield.
And while it emerged from bankruptcy at $15, today the stock sells for around $13. Investors aren't stopping at this island. You can be there first. It's worth 50% or more above today's price.
Howard Hughes not dead?
Emerging from the dark cave of bankruptcy into the light of our watchlists, General Growth spun off some excellent assets. Some that were once owned by Howard Hughes, and later his heirs, are now part of Howard Hughes Corp.
This company offers investors some first-rate properties at excellent prices. Among this company's jewels are the Summerlin high-end residential development in Las Vegas, The Woodlands in Houston, and the South Street Seaport in Manhattan.
Howard Hughes opened at $31 and closed on its first day out at $38, doubled to a $76.48 closing high on May 31, and has since retreated to yesterday's $47.61. Its assets aren't worth any less. Shares today are on sale for 85% of tangible book, and hedge fund investor and one-time Fool writer Whitney Tilson values shares from $77 to $141.
Why these two?
General Growth and Howard Hughes interest us for another reason. It's tough to find a better holding company and commercial real estate investor than Brookfield Asset Management
This is a superstar team. Not every investment for them has been a home run. Ackman lost a bunch failing to convince Target
No one bats 1.000. But if General Growth and Howard Hughes don't offer excellent upside for the risk from here, I'll eat my fedora.
Two more candidates
Bank holding company CIT Group
Though it's been out of bankruptcy longer than all of these, supermarket chain Winn-Dixie
Companies ignored because they are out of bankruptcy can be mouth-watering special situations. As lead advisor for The Motley Fool's premium stock service, Motley Fool Special Ops, I work with my team every day to bring members stocks like these -- stocks no one wants but that our work shows us have truly excellent potential return for the risk.
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Tom Jacobs is the advisor of Motley Fool Special Ops, a special situations and opportunistic value service. He favors sunglasses, trench coats, and dark alleys for finding stocks. You can follow him on Twitter @TomJacobsInvest.
The Motley Fool owns shares of Howard Hughes Corp. Motley Fool newsletter services have recommended buying shares of Brookfield Asset Management. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.