GM stock looks like a bargain, but it's a real gamble
There's much concern for General Motors employees, dealers and customers - and for good reason. But what happens to GM stockholders?
Here we go again.
Another major corporate bankruptcy and a once-stellar stock worth less than four rolls of one-ply toilet paper. There's much concern for General Motors employees, dealers and customers - and for good reason. But what happens to GM stockholders? Well, let me tell you what's happened to GM stock so far.
On Tuesday, the New York Stock Exchange suspended trading of GM's common stock because of "uncertainty as to the timing and outcome of the bankruptcy process, including the planned sale of substantially all of the company's global assets to a new entity, as well as the ultimate effect of this process on the company's equity holders and creditors."
The Dow Jones industrial average announced it was eliminating GM as one of its tracked stocks. The stock will be dropped from the Dow effective Monday. It will be replaced by Cisco Systems.
"The parlous state of GM has left us with no choice but to remove it from the Dow," said Robert Thomson, managing editor of the Wall Street Journal and editor in chief for all of Dow Jones. "A bankruptcy filing immediately disqualifies a stock regardless of a company's history or its role as a cultural icon."
Getting kicked to the curb ends GM's 83-year position in the Dow. GM was added to the industrial average twice, first in 1915 - staying on for about a year and a half - and then again in 1925. The only present company with a longer history in the Dow is General Electric.
Of course, none of this probably matters to the investors still holding GM common shares. As of Tuesday, the 52-week high for the stock was $18.18. The stock traded at a high of 81 cents on that day, then closed at 61 cents with a trading volume of more than 207 million shares.
When companies can't meet the listing requirements to trade on the NYSE or Nasdaq Stock Market, they are delisted. But shares may still be traded on either the Over the Counter Bulletin Board, otherwise known as OTCBB, or the Pink Sheets, the electronic quotation system and leading provider of pricing and financial information for stocks sold over the counter.
GM stock is listed on the Pink Sheets under the ticker symbol GMGMQ. The letter Q indicates a company is under bankruptcy protection.
In a statement, GM said it would not be "involved in initiating or supporting trading of its stock on the OTCBB or the Pink Sheets."
The company then added: "Stockholders are advised to consult with their personal financial advisers concerning investment decisions and questions concerning how to trade shares."
That's legalese for: You've been warned, buddy. Trade this stock at your own risk.
When retailer Kmart emerged from Chapter 11 in 2003, 91 million shares of stock changed hands before trading in KMRTQ was canceled. A similar thing happened when US Airways was exiting bankruptcy protection. Its stock, too, was canceled. Many investors holding the pre-bankruptcy stocks were embittered. But there was plenty of warning. They failed to understand how corporate bankruptcies work.
If you go to the Pink Sheets Web site (http://www.pinksheets.com) and look for GM stock information, you'll see a box with the word "Warning" in red with a link to the Securities and Exchange Commission's Web site with information on corporate bankruptcy. It's a caution that all such stock contains.
The SEC's warning reads: "Although a company may emerge from bankruptcy as a viable entity, generally, the creditors and the bondholders become the new owners of the shares. In most instances, the company's plan of reorganization will cancel the existing equity shares."
This is the downside of being a shareholder. As GM pointed out to investors on its informational Web site about its bankruptcy filing (http://www.gmcourtdocs.com), the bankruptcy code is clear in how it treats stockholders. They're last in line for any claim. Owners of a company under bankruptcy protection may not receive anything if the secured and unsecured creditors' claims are not fully repaid.
Some people are selling GM stock to perhaps lock in their losses for tax-deduction purposes. But others are just gambling.
There are lots of day traders and short-sellers who may be buying and selling the stock, trying to drive up the price until the stock is canceled. Day traders try to profit by buying and selling stock quickly. Short-sellers borrow stock and sell it, with the hope that they can later buy it back at a lower price, return it to the lender and pocket the difference.
I'm giving you fair warning. If you load up on GM stock now thinking you may still profit if the company emerges from bankruptcy, you'll end up with the shareholders' equivalent of a lemon.
Readers can write to Michelle Singletary c/o The Washington Post, 1150 15th St., N.W., Washington, D.C. 20071. Her e-mail address is singletarym@washpost.com. Reader can also follow her on Twitter at: SingletaryM. Comments and questions are welcome, but due to the volume of mail, personal responses may not be possible. Please also note comments or questions may be used in a future column, with the writer's name, unless a specific request to do otherwise is indicated.
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