Syms Files For Bankruptcy Protection: A Case Study In Why You Shouldn’t Trade Premarket*

Imagine that you woke up this morning and saw that Syms ($SYMS) – owner of Syms and Filene’s Basement – filed for bankruptcy protection.  Now, most of us idiots know that bankruptcy is bad for stocks, so maybe you figured you’d be all smart and sell your stock immediately, premarket, before everyone else did.  Guess what – it doesn’t work like that – you can’t “beat” the selloff.   I’ve said it before and I’ll say it again: markets may not be totally efficient, but they are efficient enough.  In fact,one thing that creates inefficiencies is guys thinking they are MORE efficient than the market!  Does that make sense?  Stay with me.

SYMS closed yesterday at $7.67.  Early this morning,  premarket on the “bankruptcy” news, SYMS traded down below $3.  It opened at $5.64, and is now trading at $9.40: UP 22% on the day!  This table, as the header notes, shows the trades that most impacted the VWAP – volume weighted average price – from 8:08 am to 09:31am.  It basically shows the largest trades below $6 in SYMS this morning.

 

Early Morning Trades in SYMS

So WTF happened?   Well, let’s play CSI: Stock Market and try to tell the story of this crime scene:  SYMS shareholders see “bankruptcy” and panic.  They go to immediately puke their shares.  However, they’re retail holders who haven’t torn apart the numbers, and they don’t realize that “bankruptcy” doesn’t mean that their stock is guaranteed to get whacked.  There are guys out there, however, who have crunched the numbers, and they’re standing there buying this stock on the cheap, and then buying more all the way back up – and buying more even now, as the stock is up more than 20% on the day.  The same guys who thought that they could exploit market inefficiencies and “sell before the news was priced in” are the very guys who created the market inefficiencies for others to exploit!  When all is said and done, the blood spatter looks like this:  High velocity seller splatter?

SYMS intraday, including pre-open


Now, I have absolutely NO CLUE what $SYMS equity is worth.  I am not a value investor, and I am not an expert in investing in “distressed” companies (if that’s what you’d call this).   What I can tell you is that it comes down to a simple case of the company having more assets than liabilities.  As the Bloomberg article notes:

“The company listed assets of $236 million, including $97.7 million in real estate inventories, and liabilities of $94 million, according to a statement filed with the Chapter 11 petition today in U.S. Bankruptcy Court in Wilmington. “

Do some quick math (and to call this BACK OF THE ENVELOPE would be a dire understatement.  In fact, I’m hoping a reader will tell me why it’s wrong**).  $ 236MM in assets.   Let’s take off $ 10mm because they say that $ 97.7MM of that is real estate, which might have to be sold at a discount (you’d probably want to do the same for their inventories of goods that they’ll be liquidating at a discount).  That leaves $ 226MM.  Subtract $ 94MM in liabilities, and you get $ 132MM- which is almost exactly what the market cap of $SYMS is now that the stock is up nicely on the day.   Is that a coincidence?  Probably not – if the assets/liabilities numbers are accurate.  I’m sure that the guys who are paying up for SYMS right now have a pretty darn good idea of the math though.  After all, markets are not totally efficient, but they are efficient enough…

EDIT:  Readers should note that there’s an asterisk in the title of this post.  Of course it makes sense for some people to trade pre-market – those are the people who know exactly what they are doing, have torn apart the valuations, and can capitalize on the mistakes of others.  As my buddy emailed me on this subject: “I would say that at least 25% of the alpha that I add is trading pre and post market. It’s pretty much my biggest advantage over the competition.”  Now remember, dear readers – his alpha comes from YOUR mistakes.  Hence the title of this post.

-KD

disclosure: no position in SYMS, but I used to buy a lot of stuff at Filene’s Basement back in the day… I bought one thing at Syms: the tux I got married in.

*unless you know exactly what you are doing!

** the main reason it’s wrong is because these values for “assets” and “liabilities” may not be completely accurate, of course.

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