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In light of the riskier market environment we are in, I have been writing to you about our new Recession Proof and Recession Resistant Model Portfolios. A great related next step is to dive deeper into the tunnel and focus on the topic of Chapter 11 Bankruptcy and how to profit by focusing on two buckets:

  • Companies that survive a bankruptcy process. Will Muscle Pharm Corp (OTC:MSLPQ) be a candidate?
  • Companies whose businesses will actually benefit as bankruptcies increase, such as Heritage Global Inc. (NASDAQ:HGBL) and Creditriskmonitor.com Inc (OTC:CRMZ)

Heritage Global, Inc. provides corporate and financial asset liquidation transactions, valuations, and advisory services. It also offers financial asset solutions, such as auction and appraisal services and financial solutions for companies in distress, especially ones undergoing bankruptcy proceedings. See Virtual Presentation here

CreditRiskMonitor.com, Inc. provides comprehensive commercial credit reports covering both public and private companies worldwide.  Comments from its last quarter’s filings indicate that the company may be able to capitalize on some near term growth opportunities, at least for as long as recession and bankruptcy risk levels remain elevated. See our Reasons for Tracking (RFT) here.

By the way, I am not sure if you know this, but Monster Beverage Corporation (NASDAQ:MNST) once filed for bankruptcy before it ended up becoming the best performing stock of the century.

Over my thirty plus years of investment experience, buying stocks that have emerged from bankruptcy has been a highly rewarding strategy. In fact, the first investment I made in a stock was a company (Storage Technology) that exited Chapter 11, where I ended up making a quick 60%. I also bought some telecom Chapter 11 exits that entered bankruptcy after the Dot Com crash. They ended up as huge multibaggers or being acquired for a nice premium.

Chapter 11 is a type of bankruptcy filing that allows a struggling business to continue operating while it reorganizes its debts and assets. This is different from a Chapter 7 bankruptcy, which involves the liquidation of a company’s assets to pay off creditors.

During the Chapter 11 process, the company communicates with the courts and creditors to develop a viable operating plan that will ensure the survival of the company, while satisfying its obligations. A ‘Q’ is placed at the end of the stock’s symbol during this exercise.

Typically, all of the existing common stock is canceled and new stock is issued to creditors in lieu of the money owed to them, and potentially to investors via private placements upon exiting Chapter 11, often resulting in a tight float.

The chance for investment success in these situations can depend on the post bankruptcy liquidity of the company, as well as a revised business plan and the terms of the restructuring arrangement as it relates to money the company still owes to debt holders, vendors, and suppliers. Many times, the restructured firm is eventually acquired.

This week, we highlight a video by investor June Collier (@JuneCollier) that gives some perspectives on what happens to shareholders when a company files for bankruptcy.  He explains a typical scenario of what happens to a company’s stock as it files for bankruptcy, and if there is any hope for shareholders.

I’ll leave you with two case study charts highlighting two well-known companies that were once on GeoInvesting’s Model Portfolios after they exited Chapter 11 – Charter Communications, Inc. (NASDAQ:CHTR) and Spectrum Brands Holdings, Inc. (NYSE:SPB):

CHTR Chart Post Chap 11

SPB Chart Post Chap 11

It’s important to point out that, at their peaks, better performances were left on the table with these portfolio holdings after they were removed from our model portfolios. It’s a bit eye-opening to view the above charts and see what rewards just a few more years would have reaped.

So yeah, investing is hard (also illustrated by the Canterbury Park Holding Corpora (NASDAQ:CPHC) (chart below), and it’s not always a win. As a matter of fact, as you can see, had SPB been a longer term hold, there’s a chance we could have exited the position for a loss as late as 2022 – a far cry from the 195% peak return a theoretical 2017 exit would have given you!

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