‘Dumb Money’ on Robinhood Is Winning With These Bankrupt Stocks

Millennial investors on Robinhood are buying bankrupt stocks despite the high risk of shareholders being wiped out in bankruptcy proceedings.
Posted in: MarketsOp-ed
Published:
June 9, 2020 1:58 PM UTC
  • Bankruptcies are not preventing millennials from investing in stocks.
  • The bankrupt stocks have surged in a reality-defying rally.
  • If millennials need a warning, they need not look any further than Sears.

The stock market rally has defied all the odds, including disease, high unemployment rates, and civil unrest. And now retail investors are fearlessly lapping up the stocks of companies that have filed for bankruptcy. In some cases, this is after the so-called smart money has bailed.

If the current trend persists, veteran billionaire investors might want to check their overconfidence and cluelessness every time they refer to retail investors as “dumb money.”

Here are some of the bankrupt firms whose stocks millennial investors are buying in droves.

Millennials hitch a ride with Hertz stock

After filing for bankruptcy on May 22, Hertz (NYSE: HTZ) has become the third most popular stock on Robinhood.

In the past 30 days, the number of Robinhood accounts holding Hertz stock has increased by over 82,000.

HTZ is the third-most-popular stock on Robinhood over the past 30 days despite filing for bankruptcy protection. | Source: Robintrack

In what could be the perfect example of “dumb money” outperforming “smart money,” billionaire activist investor Carl Icahn is the poster child.

Icahn, who had a 39% stake in the car rental firm, offloaded his stake at an average of 72 cents. The stock is now trading at over $5. The financial hit on Icahn Enterprises totaled nearly $2 billion.

Carl Icahn lost a massive bet on Hertz; the stock has rallied nearly ten-fold after he exited his position. | Source: Twitter

The billionaire activist investor insisted that he continues to have “faith in the future of Hertz.” But it is the retail investors who translated their faith into action. The stock hit a bottom of 41 cents on May 26. On Monday, it closed at $5.50 for a gain of about 1,200%.

HTZ has surged about 1,200% in under two weeks. | Source: TradingView

Oil price collapse destroys shale producer Whiting Petroleum

Shale producer Whiting Petroleum (NYSE: WLL) filed for Chapter 11 bankruptcy on April 1, following the collapse in oil prices.

Whiting Petroleum was one of the first shale producers to file for bankruptcy protection following the oil price collapse. | Source: Twitter

The bankruptcy has, however, not prevented millennial investors from piling into the stock. On Robinhood, Whiting Petroleum is the 52nd most popular stock in the past 30 days.

During that period, the number of retail investors holding the company has increased by over 11,000.

Retail enthusiasm has resulted in the stock surging by nearly 1,000%. HTZ hit a bottom of 32 cents after filing for bankruptcy protection. The stock closed Monday at $3.51.

On the verge of bankruptcy? No worries

Reports of Chesapeake Energy Corporation (NYSE: CHK) being on the verge of bankruptcy have not prevented it from being the 69th most popular stock on Robinhood over the last one month.

Initial reports that Chesapeake was planning to file for bankruptcy surfaced in late April. On Monday, Bloomberg reported that the shale pioneer is now preparing a Chapter 11 bankruptcy filing.

Shale pioneer Chesapeake is reportedly preparing to file Chapter 11 bankruptcy protection. | Source: Twitter

The number of retail investors holding the stock on the millennial trading app has increased from slightly over 30,000 to nearly 40,000 over the last one month.

After hitting a 2020 low of $7.80 in mid-May, CHK closed Monday at $69.29. That’s a gain of nearly 800%.

Chesapeake was one of Monday’s biggest gainers. | Source: TradingView

Know when to hold ’em, know when to fold ’em

It is not unusual for stocks to rally even after filing for bankruptcy, especially as hopes of a successful recovery arise.

But past examples such as Sears demonstrate that caution is warranted. Bankruptcy may result in a healthier balance sheet, but it does not necessarily make a better business.

Sears filed for bankruptcy in October 2018 when its stock was trading at 41 cents. After emerging from bankruptcy early last year, it went on to hit a high of $2.77.

Currently, it is trading at 19 cents and has not gone above the pre-bankruptcy price for about a year now.

Disclaimer: The opinions in this article represent the author’s opinion and should not be considered investment or trading advice from CCN.com. The author holds no investment position in the above-mentioned companies.

Sam Bourgi edited this article for CCN.com. If you see a breach of our Code of Ethics or Rights and Duties of the Editor or find a factual, spelling, or grammar error, please contact us.

Last modified: June 12, 2020 10:31 PM UTC

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Mark Emem @wetalkmarkets

I cover business and the stock market for CCN. Currently based out of Nairobi, Kenya. Feel free to get in touch with me. Email: wetalkmarkets[at]yahoo.com