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Market Missing Point on Blockbuster?

(Blockbuster article updated from Jan. 28 with new Blockbuster stock movements.)

NEW YORK (TheStreet) -- Blockbuster (BBI) stock is continuing to rally, regaining some of its huge losses from the last four months, a day after it was reported that rival Movie Gallery could file for bankruptcy as early as next week.

Shares are soaring 12.5% to 45 cents in Friday afternoon trading.

As part of the bankruptcy restructuring, Movie Gallery could close roughly 1,800 stores, or two-thirds of its outlets, leading to significant layoffs, sources told the Wall Street Journal.

This would be the second time in two years the company has sought bankruptcy protection from creditors.

The prospect of a thousand stores being eliminated from Movie Gallery's portfolio, which includes Hollywood Video stores, is a tiny consolation for investors.

But as investors are making hay off the upside of the news, there is, of course, the potential downside to consider -- that Blockbuster could suffer the same fate as Movie Gallery.

In fact, buying Blockbuster on Movie Gallery's troubles is naive, Edward Neiger, bankruptcy attorney and founder of Neiger LLP, says.

"This is more of a negative than a positive for Blockbuster," he says."When Microsoft (MSFT) has a bad day, it doesn't mean you should run and go buy Apple (AAPL). When Microsoft is down it pulls down the rest of the technology sector."

Last week, Blockbuster said its fourth-quarter earnings came in significantly lower than expected due to weak holiday sales.

Blockbuster now expects a loss between $183 million and $193 million.

Shares of the company lost as much as 35% on the announcement.

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