When the Stock Market Gives You Lemons…

On Monday, thousands of investors woke up to find their investments suffering when a billion-dollar company linked to Apple lost 92% of its value in a day. So what happened to GT Advanced Technologies (GTAT)? Why was it valued so high in the first place, and why were so many investors caught off guard by its Chapter 11 filing?

Just a month ago, GT Advanced Technologies (GTAT) was trending between $17–18 per share on the NASDAQ, with a market cap of over $2 billion. The stock was on a tear, rising over 500% from under $3/share in March. The solar- and sapphire-based company had strong links with Apple, and was set to produce the sapphire screen of the Apple Watch (and perhaps even a sapphire screen for future versions of the iPhone). Apple was even funding GTAT with a 0%-interest $500 million loan to sustain its operations.

The stock received its first shock after Apple’s announcement of the Apple Watch and the iPhone 6. Speculation that GTAT would produce sapphire screens for the iPhone 6 turned out to be incorrect, and the stock declined 40% over the next week.

But this wasn’t terribly unusual. To a degree, it was expected that GTAT stock would become hyped and overvalued due to speculation surrounding its involvement in Apple’s products. A 40% decline was only a natural response to an event that grounded the market’s unrealistic expectations.

The real shock came when GTAT declared Chapter 11 bankruptcy on Monday morning. The stock subsequently collapsed to $0.80, with a market cap of just $110 million. Normally, companies valued at billions of dollars with ties to the most valuable company in the world don’t fade into bankruptcy in a month. So it’s no wonder that investors are asking themselves, what the hell happened?

The answer to that question is not yet known. GT Advanced Technologies hasn’t clarified why it is seeking Chapter 11 protection, or what financial troubles it has run into and why. The most simple hypothesis is that GTAT has had a major fallout with Apple, and that Apple is asking for its no-interest loans back immediately. This would imply that GTAT has failed to meet financial or production targets set by Apple, and would also introduce a host of questions about AAPL’s own aims — if Apple stops doing business with GTAT, what will happen to the Apple Watch?

However, the most interesting story here is just how much this bankruptcy blind-sided investors. Usually, bankruptcies are expected to a degree, and market caps reflect that. Companies with $2b valuations don’t declare bankruptcy out of the blue.

To me, this episode shows just how little investors know about the companies they invest in and the risks they take in investing. This isn’t to blame investors — a large amount of information is hidden away from the public eye, and bilateral corporate relations is one of the nuggets of information that is impossible to grasp without close contacts within such organizations. (This leads me to believe that many of those short-selling GTAT before the bankruptcy — GTAT had a >40% short float before Monday — were using insider information from Apple or GTAT). Even when a company’s stock seems like a conviction buy with a bright future, a single event can lead the company into oblivion.

It would be easy to give investors some kind of advice here, but there is none. Even the best investors, especially at the individual level, cannot possess every little piece of information about a company and its business partners — if they did, the stock market would lose a great amount of its variability. This was a total shock to all players in the market, and I personally lost a substantial amount of my portfolio as well. What’s awful for me is that I just started investing in the stock a week ago after very careful consideration of its future prospects. If I went back in time, I probably would have made the same decision.

I guess the only way to explain this episode is that sometimes the stock market gives you lemons. And sometimes you just can’t do anything about it.