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Two Ways to Make a Buck Off Bankruptcy

If you think filing bankruptcy is tough, try making a living at it these days.

As the economy has finally shown signs of life in the past six months, public companies that service the bankruptcy industry have mostly gone Chapter 0, as in the price toward which their stocks are headed.

Epiq Systems (EPIQ - Get Report), a provider of software and support for bankruptcy attorneys and trustees, has seen its shares plunge to $14 from mid-2003 highs around $23. FTI Consulting (FCN - Get Report), which built a big part of its business around helping large corporations restructure and emerge from bankruptcy, has sunk to the $15 area from mid-2003 highs around $32.

Both stocks have stabilized in recent weeks as short-sellers have paused to catch their breath. The question now is whether renewed fears that the economy may falter in the next six months will yield a positive revaluation of these companies' prospects, sparking a rebound in their shares.

The Case for a Rebound

It's not as unlikely as you might think. The Economic Cycle Research Institute's Weekly Leading Index, which has accurately forecast the last several recessions, has persistently turned down since the fall, but it has started to sink in a more pronounced way over the past three months.

The Weekly Leading Index is on the lookout for changes in the pace of U.S. economic activity on the six-month horizon, which is one reason the market may have struggled since the start of the year. Indeed, it was interesting to see first-quarter U.S. GDP figures cut last week from the high level originally reported.

A good recipe for an improvement in the shares of bankruptcy-related companies is one in which the economy stumbles at the same time interest rates and the price of energy are rising. Companies that are on the edge financially can find themselves pushed over a cliff in this environment, as expenses go way up and sales flatten or decline.

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