Millennial investors on Robinhood are buying bankrupt stocks despite the high risk of shareholders being wiped out in bankruptcy proceedings.
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.
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.
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.
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%.
Shale producer Whiting Petroleum (NYSE: WLL) filed for Chapter 11 bankruptcy on April 1, following the collapse in oil prices.
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.
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.
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%.
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.
Last modified: September 23, 2020 1:59 PM