Restructuring Idea

I love obscure stock ideas that Wall Street (mainstream investors) are not talking about. Small issues that are bombed out. Industries that are not the talk of the cocktail party. Shunned and beaten down. One of my favorite places to find these obscure stock ideas are in the bankrupt and restructuring space.

Post-bankruptcy stocks are one of the most alpha rich areas of the stock market. There are a few reasons for this.

1. When a stock goes through a bankruptcy process the investors holding the common units typically get wiped out. They lose everything and get burned so bad they become gun shy. There is real trauma to losing money in the market and avoiding the company you lost money is real.

2. During a bankruptcy process the common stock typically gets wiped out and senior debt gets the new equity in the restructuring. Debt holders are not equity investors. So when their debt gets converted into equity there is selling pressure as the former debt holders dump the equity, making a bombed out stock even more desolate.

3. Post-bankruptcy stocks tend to trade on the OTC boards. Most reputable Wall Street funds do not invest in OTC stocks, giving private investors willing to do independent research. an edge

4. Capital structures of post-bankruptcy stocks can be confusing. There tends to be a significant amount of debt, warrants, preferred stock and a number of other issues. Valuations are not as straight forward.

The company I am writing about is a company going through the bankruptcy process. The equity is bombed out. The industry is hated by Wall Street as meme investor have given a number of names in the space a sour name. In addition, the industry has still not recovered from COVID.

Over the past week this company has announced final details on the restructuring plan. The equity looks extremely interesting and if you peel back the layers there could be meaningful upside for a company that can generate 35-40% operating margins and over 70% market share.

Let’s dig in…