Is Bankrupt Stock Speculation a Danger Signal for the Stock Market?
$Tupperware Brands (TUP.US)$ and $Yellow (YELL.US)$ have recently experienced dramatic surges in their stock prices. Despite Tupperware's warnings of nearing bankruptcy, retail investors have flocked to the stock over the last three weeks, driving its share price up by more than 500% since hitting a low of $0.61 on July 19. Similarly, shares of Yellow, a trucking company that had announced plans to cease operations and file for bankruptcy, saw an astounding increase of over 700% from a low of $0.432 on July 24.
In addition to bankrupt stocks, the surge in meme stocks is also notable. The $ROUNDHILL MEME ETF (MEME.US)$ , designed to track stocks popular among retail traders, reached a new one-year high on July 31 and gained over 60% year-to-date. How the market perceives the reasons behind the retail investors' preference for these stocks varies.
1. One argument is that bankrupt and distressed names may seem cheaper, especially compared to technology stocks that have experienced substantial rallies.
Thomas Hayes, the managing member at Great Hill Capital, said, "There's widespread panic-buying and catch-up trade from those who risk going into the year-end flat while the S&P is up 18%."
2. An overcrowded short position in a stock is another possible reason investors are attracted to bankrupt stocks. It is also possible for a bankrupt stock's price to increase due to a "short squeeze", or from short sellers' profit-taking.
"The last reason I believe is the large percentage of short interest in these companies," said JJ Kinahan, chief executive at IG North America.
3. In Yellow's case, retail investors seem to have confidence in the value of the company's liquidated assets, even though the order of liquidation for creditors comes before that of shareholders in bankruptcy proceedings. According to the report of The Wall Street Journal, people familiar with the situation said the investors believe that the company may have greater value in the event of liquidation than as a going concern due in part to the significant real estate assets it owns, particularly its longtime terminals in prime areas with ample parking.
Ihor Dusaniwsky from financial data provider S3 Partners: "The huge volume of shares traded this week indicates the rally is driven by new buyers snapping up shares rather than traders simply covering short positions. "
Some analysts smell danger in bankruptcy stock speculation and meme stock surge.
Dennis Dick, market structure analyst at Triple D Trading: "What we have seen historically is that when short squeezes are happening in some of these zombie-like companies that are burning cash or in really beaten down names, that's usually more indicative of a sign of the end of the bull market as opposed to the beginning."
Source: Moomoo, The Wall Street Journal, Yahoo finance
Disclaimer: Moomoo Technologies Inc. is providing this content for information and educational use only.
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Giovanni Ayala :![[undefined]](https://static.moomoo.com/nnq/emoji/static/image/default/default-black.png?imageMogr2/thumbnail/36x36 "undefined")
70918501 : wow, the USA shorts has killed another business and the government want do anything about it.
Mrsjmunoz : FALSE INFO: bankrupt stocks such as GameStop and AMC Entertainment were amplified by a “short squeeze." Remove this or lawsuits by AMC will be filed
Matomic : people trying to catch the next amc or gme
SpyderCall : stocks that file bankruptcy often rip off of the bottom. Most of the time it is a very well known company name like tupperware, Revlon, Bed Bath and Beyond, games top, AMC, etc. Less well known companies dont recieve the same sentiment.
Investors might believe that these companies will survive a bankruptcy, so the price is cheap, or even get bought out by a bigger company eventually.
If big name companies like this survive a bankruptcy, then investors will probably not get a cheaper price on the stock.
If a big name company like these get bought out, then the buyout price will possibly be higher per share than the listed price OF BIG NAME COMPANIES LIKE THESE.
I should mention that economic data indicates that the economy is not deteriorating and is showing signs of strength. This is a more accomidative environment for a company that is going through bankruptcy.
Moomoo News Global OP Mrsjmunoz : The "bankrupt stocks" we are using as examples here include those facing imminentbankruptcyor caught up in bankruptcy rumors and individual stocks that are in financial distress. In order to avoid any misunderstanding, we have adjusted the relevant description. Thank you for your attention.
FANCY PANTS Moomoo News Global OP : GAMESTOP IS NOT UNDER ANY FINANCIAL DISTRESS.
THEY HAVE NO DEBT AND OVER A BILLION IN CASH.
BE SMARTER NEXT TIME!