Trading bankrupt stocks on the OTC Markets is not for the faint of heart. Once a stock gets the Q symbol, institutions dump their shares and run for cover. However, this does create an opportunity for astute OTC traders who have seen this play out time and time again. The latest example is Sears Holdings Corp (OTCMKTS:SHLDQ).
The fate for Sears common shareholders rests in the hands of Sears Chairman Eddie Lampert. There are pros and cons here. On the pro side is that Eddie Lampert does know where all the bodies are buried. He has been involved with Sears since 2005 when he merged Kmart and Sears. He has the money and the self-interest to save Sears as the company’s largest shareholder. It’s in his best interest to work out a deal and maintain control.
Lampert has offered two options to try to keep the company afloat, a $4.4 billion plan that would save 425 locations and a less-ambitious proposal that would keep at least 250 of the little under 700 it had when it filed for bankruptcy in October. The primary bid would also save all of Sears’ business units, according to an outline of the plan filed with the Securities and Exchange Commission on Wednesday. Lampert’s smaller bid would buy a few other pieces of Sears. The rest of the company would likely be liquidated.
Holders of SHLDQ need to remember that common stock is unsecured. Both bids for Sears are less than its $5.33 billion enterprise value (debt minus cash). Secured credit holders have a seat at the table first, followed by vendors and suppliers. Common shareholders are last.
No matter what, the saga will continue via litigation. The good news is that in litigation there needs to be someone with deep pockets to go after. In this case, it’s Eddie Lampert who has driven Sears into the ground and ruined shareholders all while he has self-dealed and according to reports has actually made money investing in Sears. According to USA Today,
A committee organized to represent the retailer’s unsecured creditors in court accused Lampert and his hedge fund ESL Investments of potentially structuring deals to gain an unfair edge as the company declined. They “may have exercised undue influence to siphon value away from the Company on favorable terms,” the creditor’s group said in a court filing. The group also said Lampert may have leveraged his “insider status to obtain an ever-increasing percentage” of Sears debt, allowing him to “obtain beneficial positions” in the retailer’s Chapter 11 bankruptcy.
According to the NY Post, the latest offers from Lampert represent the first time he has made a financial offer to avoid costly litigation.
The bids represent the first time Lampert put a price tag on what he’s willing to pay — $35 million — in exchange for not being sued. All of the offers are contingent on ESL being released from any liabilities related to transactions that occurred prior to the October 2018 bankruptcy filing.
Currently trading with a market cap of $53 million (109 million shares outstanding), is a potential lotto ticket on the OTC Markets. Traders need to keep in mind that all is highly speculative right now. The best result we envision is a settlement with Lampert. He has already offered $35 million (his starting bid) and it will most likely cost him $100 million. If that’s the case, SHLDQ holders are looking at $1 a share.
However, we must urge caution. Sears has over $5 billion in debts. There is a lot of misinformation on the iHub message boards like the following post.
Sears is not worth $41 per share. It has debt. The bankruptcy court and subsequent litigation will decide the fate of SHLDQ holders. For now, we stress extreme caution and to play the momentum. SHLDQ is perfect for day traders and for those willing to gamble. Sears might just pay off.
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Disclosure: We have no position in SHLDQ and have not been compensated for this article.
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