This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
Stocks Under $10 with 50-100% upside potential - 14 days FREE!

Nearly Worthless AMR Shares Spike Higher

DALLAS -- (TheStreet) - Shares of bankrupt AMR Corp. (AAMRQ.PK), the parent company of American Airlines, gained nearly 18% Tuesday, leading airline stocks even though they are all but worthless.

The stock traded up 8 cents to close at 53 cents, their highest price since Aug. 13. By contrast, shares in Delta (DAL) and United (UAL) were flat.

It is possible that some traders believe AMR shares may benefit from the possibility that American pilots will approve a tentative contract agreement that has been endorsed by the Allied Pilots Association. That agreement provides AMR stock for pilots. The miscalculation here is that pilots will receive newly-issued shares, not the ones that currently trade.

In fact, the existing shares have no intrinsic value and are certain to become worthless when the American bankruptcy case ends. This is what has happened in the cases of every other airline that has operated under bankruptcy court protection during the past decade.

The New York Stock Exchange delisted American, which had traded under the AMR symbol, on Jan. 5. Trading then moved to the OTC Bulletin Board (OTCBB) and Pink Sheets Electronic Quotation Service with the shares getting a new symbol, AAMRQ.PK.

At that time, AMR warned traders that "in most Chapter 11 cases, holders of equity securities receive little or no recovery of value from their investment."

Bankruptcy law is intended to enable companies to shed obligations and to become healthy again. The path to good corporate health includes the right to issue new stock, much of which goes to satisfy creditors. This requires cancellation of pre-bankruptcy stock.

Nevertheless, shares continue to trade until bankruptcy case ends. Traders presumably include both speculators who know the shares will become worthless and innocents who believe the shares will continue to provide ownership in the airline. Sometimes, parties from these two groups find one another.

In a few recent cases, post-bankruptcy trading was particularly active.

In the case of Northwest Airlines which filed for bankruptcy in 2005, a coalition of hedge funds contested the normal procedure of declaring shares worthless. In 2007, a group calling itself the Ad Hoc Committee of Equity Security Holders filed a motion seeking representation among creditors. The court appointed an examiner to study the matter, but the case was eventually dropped after the carrier agreed to pay attorney's fees.

In other words, the principal beneficiaries of the share price fluctuation were people smart enough to sell when the shares rose and the attorneys who got paid.

In the GM (GM) bankruptcy, shares of Motors Liquidation, a post-bankruptcy shell company, continued to trade. In some cases, investors complained they were duped by misleading online disclosures into believing those shares had actual value.

-- Written by Ted Reed in Charlotte, N.C.

>To contact the writer of this article, click here: Ted Reed

Select the service that is right for you!

COMPARE ALL SERVICES
Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!
DOW 16,563.30 -317.06 -1.88%
S&P 500 1,930.67 -39.40 -2.00%
NASDAQ 4,369.7730 -93.1290 -2.09%

Brokerage Partners

Rates from Bankrate.com

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs