Imagine you had $1.5 billion. In cash. Just sitting around at your house.
Now imagine dumping this load of cash in your backyard, dousing it in gasoline, lighting a match, and setting it all on fire.
That’s exactly what one company did Monday morning as it abruptly declared bankruptcy. And not only is this bankruptcy bad for its stock (shares dropped an eye-popping 90% on the day), it’s also a potential problem for other momentum-driven tech trades.
Here’s what happened — and what it could mean for your portfolio…
GT Advanced Technologies (NASDAQ:GTAT) filed for bankruptcy Monday morning. The $1.5 billion company makes Sapphire glass, a material that’s supposed to be incredibly strong. This glass is used on the camera lens of iPhones — but it’s not the glass used on the iPhone’s screen.
After GTAT reopened for trading, its market capitalization was cut to below $200 million. In just a few minutes, the stock had completely imploded.
The bankruptcy happened so fast that no one really knew what was going on. Scrambling analysts say that Apple might have called back some of its interest-free loans granted to the company as part of a supply agreement. But they’re just guessing at this point. All we know now is that anyone invested in this stock took a huge hit…
“Monday’s news comes about a month after Apple announced its latest iPhone models, which some investors were betting would feature a full sapphire display,” Business Insider reports. “They didn’t, and immediately following that announcement shares of GT Advanced sold off.”
I’m not going to sugarcoat it: GTAT was a hot stock not too long ago. Heck, it was trading for $20 back in the summer. Unfortunately, a lot of people holding on for a pop after the recent disappointing Apple announcements probably took a massive loss today.
However, no matter how surprising it might seem, this crash didn’t come out of the nowhere. In fact, GTAT started showing crucial warning signs weeks ago when it fell below long-term moving averages and continued to leak lower. As usual, stress in the charts showed up long before the bad news.
Now, my main concern over this whole GTAT mess is how it will affect other momentum stocks. While GTAT’s troubles have little to do with other upstart tech companies, witnessing a total breakdown in a former high-flyer might cause traders to think twice before jumping on another hot stock…
Watch these momentum stocks carefully this week. If traders decide to retreat, many of these names could take a hit.