Jun 11, 2020 - Economy

Gambling on worthless stock

Data: FactSet; Chart: Axios Visuals
Data: FactSet; Chart: Axios Visuals

If stock trading is the new sports betting, then the best kind of stock to gamble with is a stock that's guaranteed to end up being wiped out entirely.

The big picture: Bankrupt companies like Hertz, Whiting Petroleum and JC Penney are great gambling vehicles for low-information bettors. Much like bitcoin, they have no intrinsic value; their share price is therefore simply a reflection of short-term flows and manias.

By the numbers: Hertz rose from 83 cents per share on the morning of June 4 to as much as $5.85 per share in the afternoon of June 8. Whiting Petroleum closed on June 4 at 85 cents; on June 8 it closed at $3.48. JC Penney rose from 21 cents per share on June 5 to 67 cents the following trading day.

  • The buyers were not making sophisticated bets that the equity of these companies might somehow have residual value post-bankruptcy. (It won't.)
  • Instead, they were playing a game of "how long can you hold on to a rising stock with a fundamental value of $0 before it crashes."

My thought bubble: Day trading bankrupt penny stocks is a bit like buying lottery tickets. So long as you know the risk involved, it can be a fun way to dream of riches while (ideally) leaving your long-term retirement investments untouched.

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