Ask Matt: Are Eastman Kodak shares a bankrupt bargain?
Q: Would you buy Eastman Kodak stock now that the share price is so low and the company might emerge from bankruptcy protection?
A: Cheap shares of once-strong U.S. corporations now in bankruptcy protection can be so tempting. But don't fall for the trap.
Shares of once-vibrant companies such as General Motors, Kmart and Washington Mutual are all examples of companies that fell on hard times and subsequently saw their shares fall to pennies. Some investors, betting these companies had to come back, jumped in. But by doing that they lost just about everything they put in.
Some investors figure that companies that were as large and powerful as Eastman Kodak can't just vanish. And because of that, they think that when they see the shares trading for just 22 cents that they can't miss. But investors who assume this are missing a few key points that wind up resulting in huge losses and disappointment.
When companies undergo bankruptcy restructuring, common stockholders are last in line for what's left of the remaining company. It's pretty common for the common shares to be delisted from a stock exchange and ultimately be moved to a lightly regulated marketplace. That's what's happened with Kodak shares. Some shareholders find getting out of these positions can be costly or troublesome.
Furthermore, most of the valuable parts of a company may be sold or carved out to satisfy debt obligations. Its pretty typical for ownership of a company to be transferred to the debt holders, who have claims on the company's assets ahead of common stockholders.
While GM eventually re-emerged as a public company, original investors lost practically everything.
Can Kodak pull itself out? It's possible. The company plans to emerge from bankruptcy protection next year. But even if it does, that doesn't mean owners of the common shares will reap any benefit at all. In fact, if history is a guide, owners of Kodak shares will end up with little more than a capital loss.
