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lunes, 19 de enero de 2015

Investment in companies undergoing restructuring

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This form of investment is to invest in companies that are going through bad times due to poor performance of the business, lawsuits, mismanagement, natural disasters, etc. In these situations the balance sheet and income statement present poor results, so the stock price reaches very low levels. On many occasions the company runs a high risk of disappearing.

Technical analysis and fundamental analysis are not always exclusive but is preferable to combine both approaches, especially in these situations because in these circumstances it is usual that many investors make irrational decisions, whether buying shares, causing strong rebounds in companies that are practically doomed to disappear, or selling shares, selling at any price the shares of companies that have problems but it is very unlikely that they will disappear.

It is essential to follow closely the solutions adopted to revive the company, because sometimes appear new partners who contribute with new capital but this can cause the dilution of the participation of existing shareholders in the company. It may be the case that new capital refloat the company and the firm return to profit yet the value of the old shares is reduced to a greater or lesser extent, even to zero.

In value investing the investor buy companies whose value is much higher than its price and wait for the market to recognize that value. In companies which are restructuring the process is different; buy something that is very bad but, in the opinion of investors who buy those shares, is likely to increase its value by changes in its assets, special action plans, radical change in the activity of the company, etc. Actually any restructuring is a specific case, far more risky than usual value investing.

If the investment is a success the revaluations are usually much higher than the market average, and the positions are usually kept for years as a company is not reformed in two days.

Many times the price of these companies can evolve very differently to the whole market, may have large revaluations as the market falls if the company plans succeed or sharp declines as the market appreciates significantly if the company does not get out of their plight.

The examples are endless but to name a few; a manufacture of paper reconverted in a manufacturer of refrigerators,  an industry that is converted into a real estate company leveraging the grounds of their factories, etc. NOKIA, for example, began as a paper manufacturing in 1865 and has transformed its business several times to the present.

Such investments have a very high risk.

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