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By Paul Waldie
The Globe And Mail
Report on Business
Saturday, January 3, 2004
Bankrupt airline's shares rise 14% even though they're expected to be worthless.
Maybe it was the excitement of a new year, but for whatever reason Air Canada's share price jumped 14 per cent yesterday, even though the stock is expected to be virtually worthless in a few months.
Adrian Mastracci, investment counsel and president of Vancouver based ‘fee-only’ KCM Wealth Management, says, “I'm mystified as to why anybody would chase things like this when we know that when it comes out of bankruptcy those shares are worth zero, or pretty close to it.”
Short sellers, day traders and hopeful investors combined to drive the insolvent airline's share price as high as $1.68 on the Toronto Stock Exchange yesterday. The shares closed at $1.51, up 18 cents. They traded at $1 just before Christmas.
Air Canada is operating under court protection from creditors and it is hoping to restructure by the end of March.
The restructuring hinges on a plan put forward by Hong Kong businessman Victor Li that would inject about $1-billion into the airline, but leave current shareholders owning just 0.01 per cent of the company.
That equals about $0.0017 per existing share, according to analysts' estimates.
Despite those estimates and calls by pundits everywhere to avoid the shares, some investors appear to believe the stock will somehow defy expectations.
Retail investors "are in there huge," one trader said yesterday morning as the stock climbed. "And, you know what? They are getting creamed. I feel bad for them."
The trader, who asked not to be named, made nearly $4,000 shorting the stock yesterday and was waiting for another runup to short it again.
"If people want to throw money away like a casino, then knock yourself out. I'm going to turn around and give myself a paycheque for my two kids and my dog," he said.
He added that trading in Air Canada's shares "is not driven on fundamentals whatsoever" and "continuously defies the laws of investment acumen."
Analysts said the share price also got a jump from other short sellers buying stock to cover year-end short positions.
Typically, short sellers borrow shares and then sell them hoping the price falls so they can buy the stock back at a lower price. However, Air Canada's stock has been shorted so much there are few shares to borrow. That means short sellers have been forced to buy stock in the market to cover their position, which drives up the share price.
Adrian Mastracci, president of Vancouver-based KCM Wealth Management Inc., said he can't understand why any investor would go near Air Canada.
"I'm mystified as to why anybody would chase things like this when we know that when it comes out of bankruptcy those shares are worth zero, or pretty close to it," he said yesterday.
"Hope is always something that springs eternal, there is no doubt about that. But I don't know what the big to-do is about this one."
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