It’s not every day you feel good about buying a bankrupt company, but investors should have confidence in American Airlines (AAMRQ) right now.
Shares of American Airlines parent AMR Corp. took a 50% plunge Tuesday on news that the Department of Justice was calling shenanigans on American’s merger with US Airways (LCC).
But I see the DoJ’s filing to block the carriers’ coupling as a buying opportunity, and jumped in yesterday afternoon.
The DoJ is worried about the deal leading to higher fees across the airline industry. As reported by The Washington Post, the merger “would have created the world’s largest commercial air carrier and would have put 86 percent of U.S. air travel in the hands of four big airlines.” Attorney General Eric Holder summed it up even more, saying it would result in “higher airfares, higher fees and fewer choices.”
On the other side of the fence, a senior official for the airlines told the Post that this turbulence could be overcome by year’s end.
Truth is, unless you’re a whiz at antitrust law, there’s no point in pretending you can handicap the outcome. All you need to know is that at the end of today’s news, this buyout remains a possibility.
And as far as sheer return is concerned, the risk-reward is too sweet on the latter side for me to resist.
The risk is simply wherever you or I decide to put a stop-loss. The combination of those who still have faith that a merger will happen and those who realize American Airlines might not be completely worthless even if the deal is blocked helped support AAMRQ around the $3 level. Until a decision is made, or until we hear some pretty definitive news to the negative, we’re probably not going to stray much lower from here. I bought in a few cents above $3, and I’m setting a limit at $2.55. That’s that.
For that 15% risk, I could reasonably expect to reap returns of up to 90% — if the lawsuit is dismissed, and the merger goes through, one could expect AAMRQ to surge all the way back up to around $5.80, which is where shares opened Tuesday morning.
The return very well could be less. AMR said it plans to fight the suit, and the DoJ is going for all the marbles, so a settlement doesn’t seem to be in the cards … but the question of how AAMRQ shares would be valued has been up in the air even before the merger was announced. Nonetheless, a significant pop of some magnitude following a green light seems much likelier than not.
Just remember: If you do decide to make a similar play, this should be a small, speculative position — this is nothing to throw the bank at, and you’ve got to be perfectly willing to eat a 10% to 15% loss.
And keep your eye on the headlines. If and when this thing pops, get ready to pull the trigger.
Kyle Woodley is the Deputy Managing Editor of InvestorPlace.com. As of this writing, he was long AAMRQ. Follow him on Twitter at @IPKyleWoodley.
