Buying Stocks

BUSINESS failures do happen, and that's a shame. But many investors are finding bargains in bankrupt firms. They buy up the stocks and bonds of big, bankrupt corporations at distress prices. These speculators hope that the companies will come out of their court directed reorganizations slimmed down and comparatively debt free, and that the increased value of their securities will amply reward investors for the steep risks they are taking.

Investors' eyes glisten at memories of the huge fortunes that were made on such bankrupt companies of the past as Penn Central and Interstate Stores, which later became Toys "A" Us. Of course, many investors in bankrupt firms have lost considerable money: Global Marine is just one example.

The potential for gain springs from the nature of the bankruptcy laws. They are designed to give moribund companies a new lease on life, to let them work out a plan to pay off creditors. Among those creditors, bondholders have the first claim on a company's assets. Common stockholders' rewards are much less assured. They are entitled to whatever assets are left if any after the bondholders and other debt holders are paid.

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. It reports on the prospects for securities of companies in trouble, including a list of 20 stocks to buy or hold.