DJ Horrigan got the shock of his life this week when he saw Kmart ( KMRT) crossing on the Nasdaq at more than $20 a share.

The Des Moines, Iowa, resource manager thought the stock was cheap two years ago when he paid $2 apiece for several hundred shares, betting on a turnaround. It proved grossly overpriced, of course, going to zero after the company filed Chapter 11 in January 2002.

Now it's back, trading for a spiffy $18.50 one month after reappearing on the OTC bulletin board at about $14.

"When I found out that my stock was worthless while other people were buying new stock at over $20, I felt kind of betrayed by the organization," Horrigan said. "I'm not buying the new stock. I helped them once, and that is enough."

Doomed to Repeat It

Skeptics say Kmart's latest crop of investors would be wise to consider Horrigan's plight.

"Once burned, twice shy," said Marie Driscoll, a retail analyst at Argus Research Group. "All retailers are suffering now. Why would someone holding worthless Kmart shares step back into something like that now? I wouldn't. For Kmart to come out of bankruptcy in an environment like this is suspect to me."

Kmart emerged on May 6, having shed $7.8 billion in debt. Creditors got the haircut. Julian Day, the former Sears ( S) executive tapped to run Kmart in early 2002, announced on Tuesday morning that shares had been approved for trading on the Nasdaq.

The new shares opened at $17.55 and shot as high as $21.42. By the end of the trading day, investors were paying $19.71, betting that the start of a new chapter in the discount retailing saga had begun.

Four Letters

Kmart is a strange addition to the tech stocks that are typically listed on the Nasdaq. Sebastien S. Kresge opened the first store in the Kresge chain, Kmart's predecessor, a century ago in downtown Detroit. The most expensive item was 10 cents, a strategy that helped turn the company into a multibillion-dollar discount chain of more than 2,100 stores.

But the seeds of its eventual demise were sown when Wal-Mart ( WMT) and Target ( TGT) (then Dayton Hudson) opened their doors 40 years ago. A miserable 2002 Christmas, debt markets made jittery by Enron, and a distributor's defection sent the chain into Chapter 11 six months ago.

At the time of the filing, Kmart listed its assets at $17 billion, with $11.3 billion in total debts and over 2,100 stores. It initially planned to emerge in July, but after Edward Lampert, a hedge fund manager at ESL Investments, acquired a controlling stake in the company alongside Martin J. Whitman of Third Avenue Value Fund, the company came back on May 6 after closing 599 stores and laying off 57,000 workers.

The first trade of the new company's stock occurred on the OTC BB on April 28 at $14.05 per share. Kmart's disclosure statement valued the rejuvenated company at $789 million to $1.539 billion, with 1,500 stores. There are approximately 89 million shares outstanding, which means that at current share prices, investors value the company at approximately $1.8 billion.

"Only time will tell if the new Kmart can survive," said Kurt Barnard, the president of Barnard's Consulting Group. "They have a lot of loyal customers who would rather die than give up their Kmart. At the same time, they have to improve their stores and steal market share from their competitors."

The Strategy

Peter Chapman, the president of Bankruptcy Creditors' Service, is more pessimistic. "It's still a retail chain that sells merchandise that people generally don't want at prices that people generally don't want to pay out of dingy stores from cranky salesclerks," he said.

Chapman argues that Kmart's restructuring allowed it to shave off its liabilities but failed to solve many of the fundamental problems that put it in bankruptcy in the first place.

"The bankruptcy was solely focused on equitizing the debt," he said.

There is some speculation that Lampert, who is also the largest shareholder in Sears, has plans to merge the two companies.

"If I were on the Sears board of directors, I think that idea would sound like a great joke," said Chapman. "The deal would appeal to Kmart, because it would allow them to hide their debt in Sears' financials, but what's in it for Sears? My personal prediction is that, by their third year out of bankruptcy, they'll be back in bankruptcy."

Kmart projects that it will lose $286 million in 2003 and then turn a $181 million profit in 2004. In 2007, the company projects a profit of $644 million.

"It's great that they're out of bankruptcy," Horrigan said. "But it's pretty disheartening that, after shopping there and buying their stock, they couldn't do anything for their common shareholders."