GM's beaten-down stock might not be a good deal

— -- When eyeing the beaten-up stocks of companies at risk of filing for bankruptcy protection, bargain hunters should beware.

But the reality is much more stark, as shares of companies filing for bankruptcy protection have a horrible history. While sometimes the companies survive, common stock investments usually go up in smoke. "The shareholders tend to lose in these cases," says Philip Russel, a professor of finance at Philadelphia University.

Reasons to be wary of beaten-down shares of companies heading into bankruptcy protection:

•Investors ended up with nothing in 22 of the 36 publicly traded companies with at least $100 million in assets that had reorganization plans approved in 2008, BankruptcyData.com says.

•Even when shareholders aren't wiped out, they are left with little of the remaining company. Recoveries following approved bankruptcy plans in 2008 were sometimes as little as 5% of the restructured company, BankruptcyData.com says.

This isn't a recent trend. Investors who bought seemingly cheap stocks, with share prices of $2 or less on average, as companies underwent the bankruptcy restructuring process lost all their money 60% of the time and overall wound up with an average loss of about 70% based on data from 1984 and 1993, according to research by Russel and Ben Branch of the University of Massachusetts.

Even in cases where a company itself might emerge, as Kmart did, the original shares are often canceled to become practically worthless.

The underlying problem is common shareholders are last in line when a company restructures. If investors want to speculate on a company's recovery, they may choose to invest in the company's debt or preferred stock, which have higher claims to a company's assets than common stock, says Jack Ablin of Harris Private Bank. But even that's risky: "It's a dicey game," he says. With GM, Ablin suspects holders of common stock will get little.