Why Are Investors Still Buying Stocks of Troubled Companies Despite Assets Being Auctioned Off?
Investment in the stock market can be a double-edged sword, especially when dealing with companies like Bhushan Steel and Amtek Auto. The ongoing insolvency auction of these companies has raised significant questions about the future of their stock value, yet many investors still choose to purchase them. This article explores the reasons behind this phenomenon and what investors can expect if these assets are acquired.
Understanding the Current Situation of Bhushan Steel and Amtek Auto
The share price of Bhushan Steel is a stark example of the volatility in the stock market. While it peaked at Rs. 40, it has now dropped to around Rs. 20. The only reason for tracking the stock was the anticipated takeover by the Tata group, which appears to be stalled. However, there is still a possibility that the stock will rebound, as buying 100 shares daily at a lower price could be a strategic move.
The Role of Asset Valuation in Stock Acquisition
While these companies are encumbered by high debt, their asset valuation remains a critical factor for potential acquirers. Despite the insolvency proceedings, these companies' assets are still valuable, attracting bidders interested in their industrial and client base. For instance, Amtek Auto is a major player in the automotive industry, serving many international clients.
Risk vs. Reward: A Calculated Approach
Investing in such companies involves a significant degree of risk. However, many investors still see it as a calculated risk worth taking. While the company remains intact, the shares carry value, albeit with uncertainty. Just as with Tesla, early investors in a struggling company can see substantial returns if the company recovers or gets acquired at a premium.
Investor Protection and the Credibility of Equity Shareholders
The insolvency auction process, while potentially lucrative for the acquiring company, poses a significant challenge for equity shareholders. Historically, equity shareholders are the last in line to get repaid after all the debt and preferred shares are settled. This means that even if the assets are auctioned off, equity investors might receive a small fraction of their initial investment, if any.
Learning from Past Experiences
Personal stories from experienced investors shed light on the risks involved. For example, an investor who bought Dr. Datson and Metalyst Forging sold both at a loss, highlighting the dangers of investing in distressed companies. The cautionary tale suggests that investors should focus on quality stocks and avoid penny stocks, which are often presented as good deals but turn out to be risky.
Conclusion
Investing in troubled companies like Bhushan Steel and Amtek Auto, despite the insolvency auction and asset valuation, reflects the complexities of the stock market. While assets might be valuable, the risks to equity shareholders remain high. Investors should approach such stocks with caution and focus on long-term, high-quality investments to protect their financial interests.