Companies that survived the massacre lost 90% to 99% of their stock value.  In the last six to nine months the patients have been moved from the ER and are mostly stabilized.  Many are still under-capitalized and not financially healthy by conventional standards.  Could that change?  There is one factor that the InvestmentBuddy thinks may have been overlooked.  Inflation. These firms borrow money from savers and those that buy packaged securities.  They loan it out in the form of loans to homeowners, businesses and to the government in the form of bonds.  What happens if the government prints enough money to cause massive inflation.  The cause and effect are well documented.  Any country that cranked-up the printing presses caused inflation.  It is the effect of more dollars (or other currency) chasing the same amount of goods and services.  There is also the substantial debt that can lead the nation’s economy into the inflation spiral.

What is the result of inflation on the “Zombie Stocks?”  Inflation makes the value of the underlying collateral (homes, equipment, business) worth more.  Not more relative to real currency like gold, but worth more in dollars.  Since the loans are in dollars, the borrowers are more likely to pay their notes.  If home become worth more and more (dollars), borrowers will be less likely to default.

The drop in the value of the zombie stocks is based on two primary fears, loss of profits and the threat of survival.  What if the threat of survival were eliminated by the influence of inflation?  Well, it is unlikely their common stock prices will rise all the way to the levels of their pre-2008 prices.  What if the new influence of inflation caused these stocks to bounce back to 25% of their former highs?

InvestmentBuddy’s Top Zombie Picks

• CapitalTrust (CT)
• Fortress Investment Group (FIG)
• Freddie Mac (FRE)
• SLM Corp – Sally Mae (SLM)
• E*Trade Financial (ETFC)
• MBIA Inc (MBI)
• Ambac Financial (ABK)

If a stock had lost 95% of its value in 2008 and 2009, a $50 stock would be worth $2.50 today.  If that equity were to retrace to a level of 25% of its former value, it would rise to $12.50.  That would be a 500% increase from the current quote.  Possible?  InvestmentBuddy does not know.  What if 1/2 of your zombie protfolio makes the climb back, and 1/2 of your zombie portfolio dies through bankrupcy or government take-over/liquidation?  The combined result would be a 250% appreciation in your zombie portfolio.  That would be a great return even if it takes 10 years to accomplish.  We don’t know the chance of that happening.  Let us know what you think.