The market rebound off the March lows is even raising the dead.
I'm talking about four "zombie" stocks in particular, housing meltdown casualties with no real value by virtually any measure. Yet they're up 100% or more in the past month, with big numbers of shares changing hands as traders game the system.
As an investor, you need to avoid these zombies at all costs. Don't get drawn in by the hoopla.
The two most prominent are those ill-fated twins of the housing disaster, Fannie Mae (FNM, news, msgs) and Freddie Mac (FRE, news, msgs). These are the government-sponsored entities that used to print money by guaranteeing and buying home mortgages.
Now they're mere shells reporting huge losses. If they ever manage to make money again, it will go to pay back huge loans from the government -- $100 billion and climbing. Average shareholders don't have a prayer.
Yet during the month, these two zombies soared around 300% on enough volume to rank them at times among the market's most-traded stocks.
Another zombie is General Motors' pre-bankruptcy stock. Motors Liquidation (MTLQQ, news, msgs) contains little more than unwanted factories and legal claims against the company. Yet in early August, it surged 140% on huge volume.
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Motors Liquidation is at least relegated to the market netherworld of the pink sheets; Fannie and Freddie still trade on the New York Stock Exchange. So does the insurance company American International Group (AIG, news, msgs), which traded up as much as 330% in August. The AIG case is more arguable, but I still consider it a zombie.
All four stocks took a beating yesterday as September opened. But that only begs the question: If these stocks are better off dead, why have investors been bidding them up?
Who's playing with zombies?
Some of the buying is legitimate, coming from investors who went short, selling borrowed shares in hopes of buying them back at a lower price later. Now they need to cover their positions by buying replacements for the borrowed shares to lock in their gains.Beaten-down shareholders are also likely to sell on any move up. But these factors don't explain all the action.
Video: Why are Fannie and Freddie moving up?
Some buyers chasing these zombies are clearly getting duped by penny-stock touts -- who take positions in dirt-cheap stocks, talk them up and then sell. Back in July, for example, one penny-stock service issued a news release stating that the GM zombie "emerged from the remains of bankrupt General Motors Corp. by taking over the best assets of the biggest U.S. automaker."
The best assets? Hardly. The same release also stated correctly that the real GM -- the part that actually makes cars -- is now a private company. But analysts aren't sure people get that. "I think there are some retail investors out there who don't realize Motors Liquidation is not GM," says David Whiston, who covers the auto sector for Morningstar. Otherwise, its movements are "just baffling," says Whiston.
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These zombies have also come back to life because of reckless gambling. "Given the rise in many of the financial stocks, people are looking around for things that rhyme, and they looked to Fannie and Freddie," says Matthew Warren, who follows those stocks for Morningstar. "People are day-trading those stocks, but I imagine that it won't end well."
Very low-priced stocks tend to attract this sort of action. But average investors who try to play the game are painfully overmatched by high-volume traders who can move cheap stocks with their buys, then exit positions, leaving others to take the losses. If you choose to play this game, you're on your own.
Here's why I think you should avoid these zombies at all costs.
Continued: 'The value is zero'
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