Bankrupt and Distressed (BAD) Research and Due Diligence

[Madclown]

That is an excellent question. Unfortunately the complete answer might be more appropriately answered in a book as opposed to a post on a message board.

If you are looking simply for the starting point or "what do I do once I have a stock symbol?" I would first look to the financial statements. Preferably begin with SEC filed financials. In most bankruptcy cases, the debotrs are insolvent from a balance sheet perspective. Those that are "hopelessly insolvent" I will typically bypass. For those that show to be "in the money" or just slightly "out of the money" from a balance sheet perspective, I will look to some or all of the following (in no particular order) in search of potential catalysts for recovery:

Recent news regarding what led to the bankruptcy
Affidavit in support of first day motions
Prepackaged plan of reorganization
DIP financing existence, terms and approval
Other court documents
Institutional Equity ownership
Bond & Equity Ownership turnover after bk announcement
Post-petition acquisitions
Bond pricing and ownership
Short Interest
Monthly operating reports
Analyst Coverage or Institutional reports
Chart support and 52 week High/Low
Trading volume
Retail support and interest (Stock message boards & Blogs)
Other research as avaliable and applicable

Many who do not understand distressed investing and/or fear owning a company in bankruptcy probably dismiss or fear because they have not taken the time to understand it or are not disciplined enough to do the required research or don't trust themselves enough to go to sleep at night owning a stock for which the only available analysis is what is in their head. In this world, there are very few people putting the information out there, for free or for pay, in an understandable format. With the absence of such available information, one is often left to their own devices or they might band together in message boards such as this one to bounce their ideas off of others. I find that there is often much more available information about bankrupt companies and it is made available with greater frequency than it would be were the company not in bankruptcy.

The trick is to learn where to get the information, how to get it fast, and how to process it, understand it and act on it faster than the rest of the market. Those who both acquire these skills and posess the discipline to process the information on a daily basis will be able to get ahead of the vast majority of the market sometimes by a matter of hours, days or even weeks.