Buying Stocks of Bankrupt Firms

So, bankruptcy investors tend to stick with secured debt. At times they will venture further down the pecking order to buy preferred or common stock. But usually they will do that only after a company has just come out of reorganization, shining with such virtues as a clean balance sheet, an accumulation of tax losses that can be carried forward to offset future earnings and a talented management with definite ideas about where it's heading.

Investing in bankrupts is not for the faint of heart or short of pocket. Even situations that look promising often do not pan out. Since the bankruptcy investment game is dominated by the professionals, it would be foolhardy to sit in without coaching from the experts at a brokerage house such as Bear Stearns or another of the firms that invest in bankrupt companies. Another source of advice is the Turnaround Letter, edited by bankruptcy investment specialist George Putnam III (Suite 801, 225 Friend Street, Boston, Massachusetts 02114; $195 a year). It reports on the prospects for securities of companies in trouble, including a list of 20 stocks to buy or hold.