Analysis: Investors look beyond GM for post-bankruptcy buys

WILMINGTON, Delaware Wed Nov 24, 2010 7:13am EST

A banner hangs at the front of the General Motors Co world headquarters announcing GM's return to the New York Stock Exchange (NYSE) in Detroit, Michigan November 18, 2010. REUTERS/Rebecca Cook

A banner hangs at the front of the General Motors Co world headquarters announcing GM's return to the New York Stock Exchange (NYSE) in Detroit, Michigan November 18, 2010.

Credit: Reuters/Rebecca Cook

WILMINGTON, Delaware (Reuters) - Along with a revitalized General Motors Co (GM.N), a host of companies that rushed into bankruptcy since 2008 are returning to the stock market, offering big returns for brave investors willing to dig for information.

One of the biggest waves of corporate bankruptcies in U.S. history is now churning out freshly minted stocks in many companies that are significant players in packaging, finance, auto parts and chemicals.

Unlike GM's red-carpet return last week, most of these stocks slip quietly back onto the stock exchange, marked by thin trading and little attention.

But some, such as auto parts makers Lear Corp (LEA.N) and theme park operator Six Flags Entertainment Corp (SIX.N), have rallied thanks to recovering businesses and balance sheets stripped of debts.

"Basically, I always look at this as a group of cats and dogs," said Joe Stauff, an analyst with Susquehanna International Group, a broker and market maker in many post-bankrupt stocks. "It is really a function of how the bankruptcy proceedings went."

Visteon Corp VSTO.OB, for example, was the center of a battle among creditors for a share of its stock while it was still in bankruptcy. Since the auto parts maker's new stock began trading in late September, investors have continued to pile in, pushing up its share price 25 percent.

Investors are not even waiting for the new stock of Tronox Inc, which is producing "the most shocking distressed investment returns I can remember," said Kevin Starke, an analyst with CRT Capital Group, a broker-dealer that specializes in bankrupt companies.

Tronox's bonds, which will convert into the stock when the company comes out of bankruptcy in a few weeks, have doubled over the past month as investors scramble for a piece of the maker of titanium oxide pigments.

The gray market price for the company's stock has risen from around $42 to $80 according to Amer Tiwana, another CRT analyst, a strong indication there will be high demand for the shares when they are reissued.

GEMS AND ORPHANS

For all the juicy returns, there are plenty of investment land mines among post-bankrupt companies.

Farukh Farooqi of Marquis Research LLC, an independent research firm that specializes in bankruptcies, cautions that post-bankruptcy stocks should not be lumped together as if they were an industry sector or asset class.

He tracks the stocks of 30 companies and only half have risen since exiting Chapter 11.

Finding winners can require digging through court documents and securities filings, but they share some general traits.

Stauff said companies that drastically pare debt in bankruptcy do best as an investment. He pointed to chipmaker Spansion Inc (CODE.N) and Smurfit Stone Container Corp SSCC.N, which both initially slumped after listing mid-year, but have risen about 30 percent in the past three months.

On the flip side is Dex One Corp DEXO.N, a Yellow Pages directory company that changed its name during bankruptcy from R.H. Donnelley Corp.

The company shed $6.4 billion of debt in Chapter 11, but exited court protection dragging $3 billion in debt as it tried to reinvent itself as a full-service marketing company.

Its shares have tanked since they were listed early this year, falling about 80 percent.

The shares of post-bankrupt companies generally face higher selling pressure, at least initially.

They are often held by hedge funds who received them in return for prebankruptcy debts, such as bonds. These investors typically want out when the company is no longer bankrupt and they often obtained their stock at a very low cost.

Post-bankrupt companies also are generally considered "orphans" that garner little mainstream analyst attention. About half as many analysts provide estimates on Six Flags, for example, than its much smaller rival Cedar Fair LP (FUN.N).

While there are fewer analysts poring over the books of these companies, their projections may also require more attention.

Take the example of Six Flags. Junior bondholders accused the company of depressing its outlook to justify cutting them out of a better repayment. Six Flags eventually adopted a plan by those bondholders, even though the company had warned it would be starved of capital. Five months after exiting bankruptcy, the stock is at a peak and Moody's recently upgraded its credit rating.

Despite the risks, Farooqi believed that "you have a better shot of finding real gems, really undervalued securities, than you would in non-post-bankrupt stocks and traditional equities."

(Editing by Martha Graybow and Andre Grenon)

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