Born Again After Bankruptcy George Putnam, T

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From time to time, we like to look at the stocks of companies that have emerged out of Chapter 11 bankruptcy proceedings. We thought it would be good to make that at least an annual event, and so we discuss below those companies that "graduated" from Chapter 11 in 2007, plus a few from late 2006.

Post-bankruptcy stocks can be attractive for several reasons. The bankruptcy process gives a company the opportunity to solve its problems and reshape its business. As a result, the company that emerges out of Chapter 11 is often much stronger than it was before filing for bankruptcy.

Despite that, most investors shun the stocks of companies coming out of Chapter 11 because their analysis is tainted by memories of the poor performance leading up to bankruptcy. There can also be artificial selling pressure as former creditors (such as vendors, bondholders and banks), who were paid off with stock, unload that stock to raise cash.

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Below are all the companies emerging out of Chapter 11 in 2007 that have publicly traded stocks with market capitalizations above $25 million. Since the class of 2007 is relatively small, we’ve also included the companies that emerged during the last quarter of 2006, some of which look particularly interesting. Many of these stocks are quite thinly traded (particularly those listed in the Pink Sheets or on the Bulletin Board), but they may become more actively traded as they get further away from Chapter 11.

Armstrong (nyse: AWI - news - people ) and Owens Corning (nyse: OC - news - people ) both make building products, and so they have been hurt by the downturn in residential construction. However, both are solid companies with strong market positions, and so they are well positioned to recover when home building picks up again.

Delta (nyse: DAL - news - people ) and Northwest (nyse: NWA - news - people ) are major airlines. Both used bankruptcy effectively to reduce their labor costs, but they have been hurt recently by high fuel prices. If fuel prices come down, profits should rise sharply at both companies. Also, both have been mentioned as acquisition targets, and there is even a possibility that they might merge with each other.

Federal-Mogul (otcbb: FDMLQ - news - people ) and Remy International (nasdaq: RMYI - news - people ) supply products to the automotive industry. Fed-Mogul, which is just now emerging from a six-year bankruptcy, appears to have done a good job solving a host of problems. Remy has a strong position in starters and alternators, particularly in the aftermarket business. While the auto industry is not completely out of the woods yet, both stocks have significant rebound potential.

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Foamex (nasdaq: FMXL - news - people ) makes foam rubber products. Two of its main markets, automotive and furniture, have been weak recently. But the company has a strong competitive position, and a new management team is doing a good job cutting costs.

Insight Health Services (nasdaq: ISGT - news - people ) provides diagnostic imaging services. While Insight's business has potential for growth, it is also subject to the risk of changes in payment rates from government programs such as Medicare.

SeraCare Life Sciences (nasdaq: SRLS - news - people ) produces biologic goods and services for the pharmaceutical and biotech industries. It appears to have a good market niche, and its valuation looks attractive.

Silicon Graphics (nasdaq: SGIC - news - people ) makes high-powered computers. It has stabilized its business, but future prospects depend on the success of its new PC-based products, which may be subject to increased competition.

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Solutia (nyse: SOA-when issued), a producer of specialty chemical products, was spun out from Monsanto (nyse: MON - news - people ), which saddled it with excess liabilities. Solutia used the Chapter 11 process to cut a new deal with Monsanto, and it looks poised to prosper as it emerges out of bankruptcy.

Time Warner Cable (nyse: TWC - news - people ) was never in Chapter 11 itself, but many of its assets came from the bankrupt Adelphia Communications (other-otc: ADLNQ - news - people ). As we reported last month, cable TV stocks have been quite out of favor for the last six months or so. However, Time Warner (nyse: TWX - news - people ) is a solid competitor, and the stock should do well when investors warm to the industry once again.

Winn-Dixie Stores (nasdaq: WINN - news - people ) operates supermarkets, primarily in the Southeast. Its markets are very competitive, and recent results have been mixed, but there is good gain potential in the stock if management can improve operating margins.

George Putnam is editor of the Turnaround Letter. Click here for more turnaround stock buys and sells. Disclosure Note: Accounts managed by George Putnam have positions in several of the stocks mentioned above.

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