Can Corporate Bankruptcy Be A Good Thing For Your Investments?

Image by: Eric
By Michael Sterling

Corporate bankruptcy happens all the time, especially among small businesses. When a company goes bankrupt, there are many reasons behind it. Some may have dug themselves in such a pile of debt with little assets to speak of, and they have no other option but to file for Chapter 7 bankruptcy.

But for other businesses, filing for bankruptcy doesn’t mean they’re finished. In fact, a Chapter 11 bankruptcy may be just the thing they need to reorganize their assets and climb their way back to the top, and in most cases, it’s these businesses that end up being the most profitable in the long run.

Everyone knows that a business is only as successful as its leadership, but when it comes to bankruptcy, the future of the business lies in its strategy. As a shareholder, when the company files under any kind of bankruptcy, the stakes you once had always change to reflect the status of the company. The chances of getting your investment back are slim.

However, investing is all about risk, and the choice to either run or stay may be one of the most important decisions you’ll have to make.

Cheaper Stocks May Be Your Greatest Asset

Take a moment to see the forest through the trees. If a company files for Chapter 11 bankruptcy, this is a sign they have wiggle room to gain their revenue back. Sure this will cause their stock to plummet, but just imagine how cheap their stock will be now.

If your invested company goes bankrupt, there’s nothing you can do to change it. No matter if you run or stay, you still lost the investment. With that in mind, you have nothing to lose if you buy more stock at a cheaper price. If the company gains momentum back, they might be worth more than they ever were before.

If you use bankruptcy as an opportunity to purchase more stocks, keep in mind that it might take years for the company to build up steam. Remember, during this time they are paying back their debts and don’t have as much money to invest in their infrastructure.

Research the market. Do they have a loyal following? Was it, in fact, poor leadership that caused them to file for bankruptcy? These things can all be  strong signs of a major come back.

Bigger Company Mergers

In 1987, Texaco Inc. filed for bankruptcy after a court ruled that they owed Pennzoil $10.5 billion in damages. Though it may have seemed like they were done for, Texaco settled with Pennzoil by paying them $3 billion, they emerged from bankruptcy after only a year, and later merged with Chevron.

The result was that shareholders didn’t lose their money. In fact when companies merge, their shareholders may take a bigger slice of the pie than they had anticipated. With this in mind, other like-minded companies can act as the “hero,” while the shareholders reap the benefits.

Note: This type of move isn’t that uncommon with companies. Keep this in mind as a major possibility when your considering leaving a failed company. Many corporations love to buyout their competitors to gain more consumers. 

Billionaires Love To Be Superman

Often times, there are small to medium-sized companies that need a little boost. And big time investors with billions of dollars and a gut feeling will bring it up from the ground. Warren Buffett bought a failing Geico in the 1950s and turned it around for it to become one of the leading insurance companies in America.

There have been many success stories of investors who shop around the market, looking for failing companies who are selling their stocks at a cheaper rate. Take some time to smell what the market’s cooking, and pay attention to what leaders are looking at. If you get on board before they do, you might ride it all the way to the bank.