Key insights
- Spirit Airlines stock experienced a surge due to speculation of government intervention, driven by Trump's comments. However, the stock's volatility and the complexities of the potential deal make it a risky investment. The stock has already given back much of its gains. Overall, this is a company-specific event with limited broader market implications.
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Shares of Spirit Airlines soared Wednesday following reports the Trump administration is nearing a deal to save the bankrupt budget carrier from insolvency.
The jump, driven by investors snapping up shares of bankrupt companies, is an example of a risky strategy generally considered inadvisable—though it can, at times, produce dramatic share-price moves. Spirit (FLYYQ) stock, which currently trades over-the-counter rather than on a major exchange, more than doubled to close yesterday at $1.50, its highest price since last August. It's given back much of that today, recently trading off some 20%. (Read Investopedia's full coverage of Thursday's trading here.)
The White House is considering lending Spirit $500 million in exchange for the option to take an equity stake in the company, according to the Wall Street Journal. The Commerce Department, Transportation Department, and President Donald Trump have all reportedly been involved in talks. Trump on Tuesday floated the idea of assisting Spirit.
“Spirit's in trouble, and I'd love somebody to buy Spirit," he told CNBC. "It's 14,000 jobs, and maybe the federal government should help that one out."
Anticipating what President Trump will do, whether with tariffs or deals with public companies, has emerged in the past year as a potentially lucrative pastime for risk-tolerant investors. But the Spirit Airlines deal reportedly being discussed comes with complications that increase the risk.
Spirit stock trades at a fraction of its previous value despite yesterday's gains. When the company exited bankruptcy last April, the stock resumed trading at nearly $9. It slid steadily in the following months and was worth $1.22 when the company filed for bankruptcy again in late August. It finished Wednesday a few cents over $1.50 and was recently below $1.20.
The Trump administration has taken equity stakes in a variety of private and public companies over the past year. For the most part, those investments have worked out well for shareholders: Intel (INTC) stock has nearly tripled in value since the U.S. took a 10% stake in the chipmaker in August. Shares of rare earths miner MP Materials (MP) are up 130% since the company struck a deal with the Defense Department last July.
But chasing a Trump bump can be painful. Lithium Americas (LAC) stock has risen 60% since Sept. 24, when reports first emerged that the administration was exploring taking a stake in the lithium miner. But traders who bought at $7 a share on Oct. 1, when the deal was announced, are out 30% of their investment. Shares closed Wednesday just under $5.
Spirit’s bankruptcy makes buying especially risky. In bankruptcy proceedings, priority is given to bondholders and preferred stockholders. Common stockholders can have their stakes wiped out or diluted by the financial maneuvering of Chapter 11 bankruptcy; It is unclear what an agreement with the Trump administration would mean for existing Spirit shareholders.
This article has been updated since it was first published to add context and reflect Thursday's trading.
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