Some Troubled Firms Turned Into Top Performers in 2004

By Jerry Knight
Monday, January 3, 2005

Flirting with bankruptcy is getting to be the most reliable way for Washington investors to pick a top-performing local stock.

Two years ago, it was Talk America Holdings Inc., the little phone company that survived as most of its peers were going into Chapter 11.

In 2003, it was XM Satellite Radio Holdings Inc., which looked so likely to go broke that its stock price had fallen to less than $2 a share before it blasted into orbit, gaining almost 900 percent for the year.

In 2004, the stock price of W.R. Grace & Co. of Columbia gained 430 percent even though it was operating under Chapter 11 bankruptcy protection, Grace outperformed every other company in The Washington Post-Bloomberg regional stock index, which includes more than 200 firms based in the District Maryland and Virginia.

Buying stocks of companies coming out of Chapter 11 bankruptcy protection is risky enough. It produced one of last year's worst losers, US Airways Group Inc., and one of the biggest winners, NII Holdings Inc., the Latin American spinoff of Nextel Communications Inc.

But investing in companies that are still in Chapter 11 is beyond the pale because their stocks almost always wind end up worthless.

Not W. R. Grace's. The stock last year climbed to almost $14 a share from $2.57, producing big gains for the hedge funds and other high-wire-act investors who own most of its shares.

Grace escaped the usual bankruptcy burial not because of management magic or financial wizardry, but because President Bush and the Republicans who control Congress decided to limit the liability of companies in the asbestos business, which face lawsuits seeking billions of dollars for health damages.

Politics is so important to Grace and other asbestos companies that the day after the presidential election, Grace stock jumped 14 percent. It was not just Bush's reelection but also the defeat of Senate minority leader Thomas A. Daschle (D-S.D.), who had led the opposition to the asbestos legislation.

Since Election Day, Senate leaders have begun work on an asbestos bill that is to be a top legislative priority after Congress reconvenes tomorrow. It would create an industry-wide fund to pay all asbestos claims and severely restrict lawsuits. Thanks to widely reported cases in which people who worked with asbestos, but have no health problems, have won big judgments, the measure has become a showpiece for people who contend that too many lawsuits are filed in the United States.

The size of the asbestos fund has yet to be determined -- $140 billion was the last number on the table -- as has the amount that each company will contribute. In its recent plan to emerge from Chapter 11 bankruptcy protection, Grace put its share of the fund at $1.6 billion, some of which would be covered by insurance.

That amount is roughly equivalent to the annual sales of Grace, which has long been out of the asbestos business and is now a profitable specialty-chemicals and building materials company that keeps a low profile and won't discuss its stock price.

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