Friday, April 8, 2011

Beware of Zombie Stocks

I just noticed something and every time I see this occur, it baffles me why people do this.

Today is April 7. Blockbuster (the movie rental company) finally gave up a couple of months ago and put up its assets for liquidation. In fact this past week, Dish Network bought the assets of Blockbuster, Inc. for a small fraction of their original value.

The stock of Blockbuster Inc. is still trading. In fact it went up over 7% today. Before you get too excited, the stock increased $0.0048, less than a half a cent. However, on a stock that is selling for 6 cents, that is a 7% increase.

My wonderment comes at how anyone in their right mind would buy stock in a company that has no assets and is completely worthless. And trust me, I'm right to say Blockbuster Inc. is worthless - it is worth zip, zero, notta. So why are people buying this stock?

One answer is that buyers are carrying out speculation of the very short-term variety. But unfortunately, I think some people are buying Blockbuster because they don't understand that it is a "zombie company." The corporate Blockbuster is dead but still stumbling around for awhile until someone mercifully puts a bullet through its head. When that day happens (it will probably occur at the close of the asset sale to Dish Network) Blockbuster stock will officially be where it belongs, at zero. And this perverse game of musical chairs will certainly end with some poor idiots holding worthless Blockbuster stock.

How can I be so sure of this? It happened with GM not that long ago. The "old GM" stock continued to trade robustly for months after the decent assets were passed to the "new GM." Then one day, I see questions being posted on novice stock message boards, "What happened to my GM stock? When will I get my shares in the new GM?" Sorry, that didn't happen and everyone who was following the story knew the old GM was a zombie stock and had been for months.

Why the SEC allows zombie stocks to trade is beyond me. But since the government won't protect you from the "zombie menace" you need to protect yourself and stay away from these disasters.

1 comment:

  1. This seems like it should be illegal! I've never heard of this...thank you for the helpful post.