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Monday, December 03, 2001

By Len Boselovic, Post-Gazette Staff Writer

Some people just don't know the difference between investing and gambling. Investing generally involves a rational decision you're willing to live with for a considerable period of time. Gambling involves much hope, little thought and leaves you with the irrepressible urge to repeat your mistakes.

In that light, consider all the people who are purchasing shares of bankrupt steelmakers such as LTV Corp. (LTVCQ.OB) and Bethlehem Steel (BS). Last week, as United Steelworkers of America, elected officials and others worked feverishly to breath new life into LTV, more than 24 million shares of the troubled Cleveland steelmaker changed hands, bringing the steelmaker to a Friday close of 4.1 cents. Trading in Bethlehem stock was more subdued, with a mere 3.7 million shares changing hands. Bethlehem shares ended the week at 37 cents.

The nonsense doesn't end there. More than 2.8 million shares of bankrupt camera giant Polaroid (PRDCQ.OB) changed hands last week, with the stock closing Friday at 9 cents. Enron (ENE), the all-but-bankrupt energy trader, finished the week at 26 cents after more than 925 million shares changed hands.

Purchasers pursue these stocks heedless of their tainted pasts and murky futures. Their behavior begs the question: Why are so many so eager to take such an unjustified leap of faith?

"If you're looking for a rational reason, there isn't one," says Greg Melvin, chief investment officer for C.S. McKee, Downtown. "A lot of it's just short covering. A lot of it's stupidity."

Call it the Al Michaels Theory of Investing, in honor of the ABC Sports announcer who did the play-by-play when the U.S. Olympic hockey team beat the Russians at Lake Placid in 1980.

"Everybody who is holding now is expecting some kind of miracle," says Chris Olin, a steel analyst for Midwest Research in Cleveland.

The only people the shares hold any value for are those who believe something will positive will happen, says Lloyd O'Carroll, who follows metals stocks for BB&T Capital Markets in Richmond, Va.

"You've got to be very speculative. It's someone trading on that basis," he says.

Chances are, buyers will be disappointed.

Even in successful Chapter 11 bankruptcies, in which companies reorganize and emerge from bankruptcy, common stockholders are always paid last and the least. Typically, bondholders get all the new stock in the company and stockholders get nothing. When stockholders are fortunate enough to get something, more than likely it's not worth much. And until a reorganization plan is approved by a bankruptcy court judge, purchasers of these shares are betting mostly on hope.

"There's no way to figure out what the court or anybody else is going to come up with," says Bob Kanters, research director for Legg Mason, Downtown.

Take LTV's first trip to bankruptcy as an example. At the end of that seven-year sojourn, stockholders received 1.16 warrants for every 100 shares of common stock they owned. The publicly traded warrants entitled holders to purchase about 0.56 shares of LTV's new common stock for $16.28 per share.

Based on the fact that LTV's new shares traded as high as $21.25 before beginning their inexorable decline, you may think LTV's old stockholders made something on the warrants. Think again.

Consider even the most unlikely scenario in which a purchaser of LTV's shares did everything right (other than actually buying the stock, that is). Say 100 old LTV shares were acquired in February 1993, when LTV's reorganization plan was announced. At the time, shares were selling for about 35 cents. Excluding commissions, it was a $35 "investment." When LTV came out of bankruptcy, the old shares were exchanged for 1.16 of the publicly traded warrants. By the fall of 1994, the warrants hit their all-time high of $5.75. If our hypothetical stockholder was lucky enough to sell his warrants at that price, he would have received $6.67 back for his $35 investment.

There are plenty of reasons for investors to be selling these shares, particularly if they have to offset capital gains on other investments. Short sellers, those who sell stock they don't own because they believe the shares are headed lower, are also among those unloading shares.

But, other than to cover a short sale, why would anyone buy them? Some professional investors are doubtless among the purchasers, hoping to profit on small swings in share price. A glimmer of good news is enough to move these stocks a few pennies, making gains of 10 percent or more possible for those savvy enough to get in and out at the right times. But such informed gambling is better left to professional investors, not the day trader with blind faith and a hunch.

Anyone inclined to dabble in the shares of bankrupt companies should seek out employees and retirees of these companies and ask them one question: how much more are you buying? More than likely, they've had all they can stomach. That's all the guidance even an unwitting investor should need.

Len Boselovic can be reached at lboselovic@post-gazette.com