Four Post-Bankruptcy Bets

10/22/2013 9:00 am EST

Focus: STRATEGIES

George Putnam

Editor, The Turnaround Letter

Post-bankruptcy stocks are often undervalued because mainstream investors perceive them (often wrongly) as being of poor quality and very risky, suggests George Putnam, editor of The Turnaround Letter.

Investors remember the bad things that happened to the company to force it into bankruptcy. What they don't understand is that many companies take advantage of Chapter 11 to reshape their businesses and balance sheets so that they emerge as very strong competitors.

As a result, post-bankruptcy stocks can provide good returns to savvy investors who are not swayed by their past history, but focus on the future prospects.

The companies discussed below all emerged from Chapter 11 over the last several years and look to us as though they are still undervalued.

General Motors (GM), one of the world's largest automakers, went through a government assisted bankruptcy in 2009. The company used its sojourn in Chapter 11 to modify labor contracts, rationalize operations and restructure its balance sheet.

As a result, the reorganized GM is a much stronger global competitor. We expect auto sales to continue to rebound and GM's stock to follow suit.

General Growth Properties (GGP) became the largest real-estate bankruptcy in history in early 2009, when it was unable to support its massive debt load.

With a new CEO and board of directors it emerged from court protection in November, 2010 as two companies, General Growth, a REIT, and Howard Hughes Corp. (HHC), which focuses on master planned communities.

Today, General Growth's portfolio consists of 123 retail properties, many of them in premier locations. We expect both its asset value, and its dividend, to rise.

Resolute Forest Products (RFP), formerly known as AbitibiBowater, entered into bankruptcy in early 2009, weighed down by roughly $6 billion in debt.

Resolute is a smaller company today, but it remains a formidable competitor in the pulp and paper industry.

The company should benefit from growth in several of its markets, including the recovering US housing market, and newsprint demand in emerging economies, such as China.

The company took advantage of the Chapter 11 process to become one of the lowest-cost forest products companies in North America. As the market for forest products improves, so should Resolute's stock price.

Lee Enterprises (LEE) is a publisher of regional newspapers. Like many in its sector, the company struggled with competition from the Internet, and it went through a short bankruptcy at the end of 2011.

Since coming out of Chapter 11, Lee has paid down debt and built up its digital business.

Among those who think that regional newspapers still have a viable niche is Warren Buffett, who owns both stock and debt in Lee. The stock has done well in 2013, but could go a lot higher.

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