PG&E Corporation (NYSE:PCG) is an industry leader in arson and manslaughter. They also do something with electricity. PCG filed for bankruptcy in January 2019 after being unable to pay billions in claims. Calling the bankruptcy process a klusterfuk is generous to everyone involved. However, it’s all in the rear view mirror. A group of troubled funds have teamed up to rig the bankruptcy process, trick claimants and ensure their LPs make big money. As usual, the peasants have been looted by Wall Street – they’d be really pissed if they figured out the details, but that’s not my fight.
PCG exists in bankruptcy
For me, there are only three facts that really matter here;
At $9, the shares are trading at about half the earnings multiple of comparable utilities. You can partly explain this by the lack of a dividend and higher overall debt levels. More likely it was because PCG was in an unusually messy situation. bankruptcy and most institutional investors are too lazy to sort out the details or can’t hold bankrupt stocks to begin with.
The biggest shareholders rigged the process so they could buy shares at distressed levels immediately before emerging from bankruptcy. Look, if you’re a fund and you know some big, smart guys with sharp elbows are out to drive the stock down so they can sell stocks for the cheapest possible price, would you stand in their way? and would you buy shares before they get their shares? Of course not, you sit on the sidelines and wait for the deal to be completed. Well, it was Friday and the price was $9.50. Look at the graph of the last months. You can literally see blood pouring out of the stock price – it was kind of intentional. These smart guys are now long – for the first time in many quarters they want stocks to go up rather than down.
PCG has just emerged from bankruptcy after the closing on Thursday July 1st. All sorts of institutional funds that were on the sidelines can now own the stock. This means that the actions will be added to the S&P500 and all sorts of other ETFs. There will be a standing bid on PCG shares as various pools of inert capital now need to increase their allocation from zero to a higher number. This process will not be immediate, but it will continue throughout this year and next. Assuming PCG doesn’t start any more fires, stocks are likely to trade from today.
Since I knocked it out of the park on Nikola Warrants (NKLA), I’ve decided I’ll write a few more event-driven situations if they’re liquid and actionable, to give you an idea of the opportunity I’m looking for. I’m not going to do a big article on the fundamentals, that’s up to you. Rather, I want to identify how a rigged bankruptcy, followed by a widely traded secondary, led to a soft stock price – followed by a bankruptcy exit that should unlock this opportunity.
I played with a combination of long and to write. There are many ways to build this trade, again it is up to you. However, I think these stocks are trading in the teens over the next few months and I want to be positioned for the ride. It is now out of bankruptcy. Let the brain-dead shopping begin…
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Disclosure: The funds I control are long PCG stocks and short PCG puts of various strikes and durations.
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