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The Allure of Bankrupt Companies for Investors

3 Mins read

The recent surge in Bed Bath & Beyond Inc.’s stock has brought attention to the peculiar appeal that bankrupt companies hold for certain investors.

Despite the well-documented struggles faced by the bankrupt home-goods retailer, Bed Bath and Beyond’s shares (BBBYQ, -7.88%) have experienced a remarkable 30.7% increase over the past month, outperforming the S&P 500’s (SPX, -0.29%) gain of 2.9%.

Bankruptcy and reorganization practice partner at law firm Greenspoon Marder, Howard Ehrenberg, sheds light on the risks associated with investing in bankrupt company stocks. While he cannot discuss Bed Bath & Beyond specifically, he emphasizes the problems faced by investors in such ventures.

In Ehrenberg’s words, “Anyone who buys and holds the stock of a bankrupt entity is almost assuredly going to lose their money.” He notes that these companies often liquidate or reorganize, which typically results in stock dilution. Furthermore, the track record of emerging stocks from bankruptcy is far from favorable.

Hertz Global Holdings Inc. (HTZ, +0.27%), for instance, filed for bankruptcy protection in 2020 and emerged from bankruptcy the following year. Currently trading at around $19, the price is significantly lower than its all-time high closing of $109.48 on August 19, 2014.

Bed Bath & Beyond filed for Chapter 11 bankruptcy protection in April and was subsequently delisted from the Nasdaq exchange. However, even with hundreds of stores undergoing liquidation sales and trading now occurring over the counter since May 4, the stock continues to captivate investor interest. According to the Financial Times, investors have traded nearly $200 million worth of these “theoretically worthless” shares since the bankruptcy filing.

The Buzz Surrounding Bed Bath & Beyond

Social media has been abuzz with discussions about Bed Bath & Beyond. Users on platforms like Twitter and Reddit have been mentioning the retailer in connection with “Teddy,” which seems to refer to Teddy Holdings LLC. This holding company filed several trademark applications last year with the U.S. Patent and Trademark Office. Although there is an apparent link between Teddy Holdings and activist investor Ryan Cohen, there is currently no indication that the holding company will be involved in Bed Bath & Beyond’s bankruptcy process.

A Resemblance to Meme Stocks

Professor Ehrenberg draws parallels between the act of purchasing shares in bankrupt companies and the phenomenon of meme stocks that emerged in recent years. He notes that these buyers are predominantly retail investors, often using the Robinhood platform, who follow Reddit threads. Their strategy is based on buying stocks based on rumors and participating in a collective purchasing frenzy in the hopes of making a profit.

Will This Holding Company Aid Bed Bath & Beyond Investors?

Some investors who have traded shares of Bed Bath & Beyond have spent a staggering $200 million on what some consider to be “worthless” shares. The question arises as to whether this holding company will come to their aid.

According to Ehrenberg, this type of investing resembles gambling rather than a comprehensive financial analysis of the company’s stock that one intends to purchase.

Uncovering the Influence of Narratives in Trading

The research paper, currently under review by the distinguished journal Collective Intelligence, sheds light on the intricate relationship between narratives and trading behavior. According to Schotanus, the influence of narratives is pervasive and can result in substantial market fluctuations, altering the very fabric of business reality.

Clunie further suggests that recent developments in the stock of Bed Bath & Beyond could also be attributed to predatory trading tactics employed against short sellers. He explains that a coordinated effort to boost the stock’s short-term price can impose significant unrealized losses on short sellers who may find it challenging to maintain their positions. Factors such as limited resources to meet variation margins or internal risk-management constraints force these short sellers to cover their positions by purchasing at inflated prices.

This thought-provoking research offers valuable insights into the captivating world of trading and provides a robust foundation for understanding and analyzing market dynamics.

Related: Bankrupt Bed Bath & Beyond’s Stock Continues Its Impressive Rally

Market Volatility and Profitable Trading

In his book titled “Predatory Trading and Crowded Exits: New Thinking on Market Volatility,” Clunie explores the concept of short selling and its impact on traders. According to Clunie, when short sellers cover their positions, they cause a loss for themselves while enabling earlier buyers to profit from selling to them. While this strategy carries risks, Clunie suggests that skilled traders can turn it into a profitable opportunity.

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