Patrick Larkin, who manages Covestor’s All Cap Value Investment Model, has an eye for companies that generate cash, boast strong, competitive positions but also have fallen out of favor with investors.
Geoff Williams of U.S. News & World Report recently interviewed Larkin, who’s also a professor of finance at Fayetteville State University in North Carolina, about the common mistakes investors make. A big one: buying the stock of a bankrupt company in the hope of windfall gains should the firm make a comeback.
Larkin thinks that’s a very risky strategy:
It’s not unusual for stocks of companies that once boasted market caps in the billions to trade for pennies per share in the [over-the-counter] markets post-bankruptcy. But the reason that the shares become so cheap is that the odds are overwhelming that the common stock of a bankrupt company is going to be ‘extinguished’ by the court. After all, companies typically file bankruptcy because they can’t pay their debts. If there were enough resources available to pay creditors and still have something left over for shareholders, then the company most likely would have been able to avoid filing bankruptcy in the first place.
Check out Patrick’s latest analysis of where the markets are heading and learn more about his All Cap Value Investment Model.