Don’t Crash Your Portfolio with AMR

When it comes to airlines, bankruptcy is a normal process. It’s a way to clean things up, fire people and renegotiate contracts with lenders and vendors. And as seen with American Airlines parent AMR Corp. (NYSE:AMR), it means the planes continue to fly.

However, Wednesday saw a different type of soaring from AMR — its stock, to the stunning tune of 60%. Of course, it doesn’t take much to reach that kind of number when the stock is sitting at just more than a buck a share — compare that to early 2007, when AMR was selling for around $40.

So why all the action in a bankrupt company in a depressed sector? One reason is short sellers are buying back shares in the open market to close out their trades.

But this surge in demand also likely caught the interest of retail investors, who are viewing AMR through rose-colored glasses: In other words, isn’t $1 per share too cheap for a brand like AMR? Won’t it come back?

Well, AMR might not be going away, but its stock price might ultimately do so. When a company goes through bankruptcy, common shareholders are the last in line to get any proceeds. In many cases, the result is a stock price that nosedives down to $0. This happened with companies like General Motors (NYSE:GM) and Enron.

Or, in some cases, the shares of a bankrupt company might wind up trading on the pink sheets — think Blockbuster Video (PINK:BLOKB) — where they trade for mere pennies.

Whatever happens, it usually means shareholders see big-time losses. So for those investors who might be tempted to take a flier on AMR, it’s probably a good idea to just not board at all.

Tom Taulli runs the InvestorPlace blog “IPOPlaybook,” a site dedicated to the hottest news and rumors about initial public offerings. He is also the author of “All About Short Selling” and “All About Commodities.” Follow him on Twitter at @ttaulli. As of this writing, he did not own a position in any of the aforementioned stocks.

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