Course 410:
Distressed Stocks
In this course
1 Introduction
2 What Went Wrong?
3 How Bad Is It?
4 Is the Stock Despised?
5 How Cheap Is It?
6 Conclusion: Putting It All Together

Investing in distressed companies is a journey to the distant frontiers of risk and return. These troubled outfits may be headed for the scrap heap. But if the down-and-out can stage a comeback, the rewards may be tremendous. Take Magna International MGA. In October 1990, this auto-parts maker fell into bankruptcy, crushed by debt and a recession. Earnings vanished, and Magna's stock price collapsed. In retrospect, it was a perfect time to buy. Magna and its creditors hammered out a restructuring plan, profits returned, and in the next five years, its stock price compounded at an annual rate of 83%. That's the upside. But there's also Pan Am. Remember that once-proud pioneer of international aviation? It was grounded by bankruptcy in 1991. Its shareholders got nothing. Some of the distressed companies in Morningstar's database are already bankrupt--in Chapter 11 reorganizations or Chapter 7 liquidations. The rest have been losing money consistently, have excessive debt on their balance sheets, or both. By asking some pointed questions about these troubled companies, we can try to distinguish the hopeless from the merely hobbled. Consider a well-known example in the distressed category: Silicon Graphics SGI. This former highflier makes high-end servers and workstations for graphics applications, but in recent years, it has fallen upon hard times. Revenues declined sharply in 1998 and 1999, and the company has been losing money in most quarters.

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