Finding Opportunity in Bankruptcy

Also look for opportunities to benefit from the bankruptcy of a major competitor. Have you noticed the relative strength of Ford Motors (F) with Chrysler filing for bankruptcy and General Motors in danger of following suit?

In the sporting goods specialty retail sector, Dick's Sporting Goods(DKS), a dominant company that is quickly expanding from coast to coast, will likely benefit from the March Chapter 11 bankruptcy filings of two competitors: Joe's Sporting and Sportsman's Warehouse. Joe's may now be heading to liquidation, while Sportsman's hopes to operate a slimmed-down 29 units. No matter how this plays out, Dick's will be a winner.

Here are some indications that a company is on the bankruptcy path:

• Ratings agencies such as Moody's or Standard & Poor's have downgraded the company's debt to its lowest rating.
• The company is unable to roll over its short-term debt, such as commercial paper.
• The Z-Score indicates that bankruptcy is imminent.

The bankruptcy laws were designed to allow for an orderly demise or reorganization of a company. While bankruptcy can evoke perceptions of failure, it may breathe new life into struggling companies. It can also provide investment opportunities if you can indentify companies on the verge of bankruptcy.

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