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  • Writer's pictureIshfaaq Peerally


Most people are scared of the word bankruptcy, they don't want to touch bankrupt companies but sometimes these companies are real bargains. For example, if you had invested $10 000 in American Airlines $AAL in 2012 when it filed for bankruptcy, you would have made $1.6 million in five years. Let's understand bankruptcy. A company goes bankrupt when it cannot repay its debt. I've heard so many people tell me that GameStop $GME is going bankrupt. As long as they can repay their debts, they won't go bankrupt. There is a difference between going out of business and going bankrupt. You can liquidate your company if you think that it is not growing but you don't have to file for bankruptcy if you can repay the debts. There are two types of bankruptcies: Chapter 7 and Chapter 11. Chapter 7 means the company is liquidated and all the money raised is used to repay the creditors. For example, Lehman Brothers and Enron filed a Chapter 7 bankruptcy. In a chapter 11 bankruptcy, the company is not liquidated but negotiate with the bondholders and restructure the debt. When a company is liquidated, the senior bondholders are paid first, then the junior bondholders, then preferred shareholders. If there's any money left, then the common shareholders are paid. The company dies after liquidation. To know if you can make money from a bankrupt company, you need to use the liquidation value. I suggest that you read the Bible of value investing, Security Analysis to learn more. A bankrupt company can come out of bankruptcy if it merges with another company. It can also come out of bankruptcy if it restructures its debts. It can do that by a spinoff or by converting the debt into equity. I'm interested in the bankrupt oil company $OIL Whiting Petroleum $WLL . Whiting Petroleum filed a Chapter 11 bankruptcy because they cannot repay their debts this year. They already negotiated with the bondholders and plan to come out of bankruptcy in 5 months. Nobody knows if this will happen. What I'm interested in are the oil assets. They have $12 billion in oil assets and $4 billion in book value (before the restructuring). They are going to convert the debt into 97% of equity. The market cap was $25 million a few weeks ago. It means the book value after the restructuring will be $120 million for current shareholders. At this price it is a bargain. Unfortunately, now it got a little expensive and I'm waiting for the price to drop to buy some shares. It is going to be less than 1% of my portfolio. This is a high risk investment. I am willing to risk 1% of my portfolio because the reward can be very big. Another important thing to look at is if you will be able to take a profit. If the company is delisted from the NYSE, you won't be able to take a profit. Be careful when investing in a bankrupt company. Companies that go bankrupt are most of the time bad companies. Make sure you understand all the risks before investing. Watch the full video on YouTube and Subscribe: Here's the full analysis of Whiting Petroleum on my research partnership: Join my private investing group on Facebook for more:

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