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The bankruptcy of GT Advanced Technologies (Nasdaq: GTAT) is a sad ending to a once promising story.
The sapphire producer watched its stock fall 90% after filing Chapter 11 on Monday.
This once small-cap darling made headlines in October 2013 when GTAT became an exclusive supplier of sapphire material to Apple Inc. (Nasdaq: AAPL). The stock got a big boost from its Apple association. GTAT drew more bulls on speculation that its sapphire would make a virtually unbreakable screen for the soon-to-be released iPhone 6.
From the day of its announcement to its peak in early July, GTAT stock gained 163.6%, from $7.50 a share to $19.77 a share.
Then things began to unravel.
Reports came out indicating that the new iPhone 6 would not use sapphire in its new screens. This supported GTAT's heavy short float from short sellers not sold on the AAPL hype.
And in August, the company reported in its 10-Q that it was incurring substantial losses from converting a 1.3 million square foot building in Mesa, Ariz., into a sapphire production facility. There had been real issues with inefficiencies, inventory loss, and impure material stocks for production that threatened the scalability of the company's sapphire business.
That's when it became clear why AAPL didn't pursue GTAT further for iPhone screen technology.
"They're in a situation where they're going to be selling tens of millions of these phones," said Money Morning Executive Editor Bill Patalon. "Yes, they want the most advanced technology and the coolest stuff in them but they also don't want to be in a situation where they have orders for 80 million phones but they can't deliver them because the company that makes the screens can't deliver."
It all came to a head earlier this week when GTAT filed for Chapter 11. An already lumbering stock dove 92.8% on the day, from $11.05 to $0.80.
It had seen a bump, most likely from short covering and from traders seeing how high they can bid up the price before equity gets wiped out through bankruptcy settlement, but by late this afternoon it had sunk back under $1.
But GTAT's story won't go to waste. Here are the three lessons the GTAT saga teaches investors...
GTAT Investing Lesson 1: Always Apply Trailing Stops
In the case of GTAT, a trailing stop would have been the ideal order.
A trailing stop executes a sale order once the stock falls below a pre-defined percentage or price lower than its current price. For example, if you set a trailing stop of 25% for a stock selling at $10, if it falls 25% below that price to $7.50, you will automatically exit the stock and suffer a $2.50 loss.
Trailing stops will also move with the stock if it goes up. If that $10 rises to a new peak $20, you will only now exit the stop if it falls to $15 (falling 25% from $20). You may have been stopped out a level lower than the peak, but you still made a $5 profit and avoided further downside risk.
Studies in behavioral finance have shown that people have trouble cutting their losses will typically hang on to losing stocks for too long. This mitigates that risk.
At one point, GTAT was a very exciting stock. It more than doubled from October 2013 to March 2014 before seeing a 20% correction. A trailing stop would have stopped the bleeding on the downside well before shares fell to $1.
GTAT Investing Lesson 2: Be Aware of Performance
Having an association with AAPL was what ultimately put GTAT on the map and gave it potential.
But the company didn't have much else to offer.
"Everybody got really excited about this company but it was kind of a one-trick pony," Patalon said. "Yeah, they were in bed with Apple. But if it didn't work, what else do they have? They don't have a history of doing business; they don't have a lot of other technologies."
GTAT has three different business segments. One of which is the photovoltaic business, in which the company produces solar cells; the polysilicon business, which manufactures and sells materials for the production of polysilicon that is used in silicon-based solar equipment; and its sapphire business.
The company's most recent 10-K filing showed troubling figures as all three segments were seeing steep declines in sales. From 2012 to 2013, photovoltaic revenue fell 35.8%, polysilicon revenue fell 52.3%, and sapphire revenue fell 78.7%.
The only real promising development for the company amid the disappointing earnings was the prospect of teaming up with AAPL to develop new iPhone screens. Once that fell through, GTAT was left with only its ailing budget books.
GTAT Investing Lesson 3: Look for Longevity
For investors trying to play the AAPL supplier game, there is a more established winner: Corning Inc. (NYSE: GLW).
Yes, GLW did ultimately win the AAPL glass supplier sweepstakes with its innovative Gorilla Glass, a strong, damage resistant material used in iPhone screens since the iPhone 4s model.
But GLW is more than just AAPL's supplier.
GLW is a recognized manufacturer of glass and ceramics products, with over 160 years of experience, once famous for its cookware.
It has put more than 100 years into research and development for glass products and has always been looking at new ways to adapt to the changing landscape for consumer electronics.
"Corning's got about 100 years of history in glass," Patalon said. "People don't think of glass being a technology but it is."
GLW has a big opportunity to break into the wearable tech trend with its bendable Willow Glass technology, which Patalon said will keep GLW stock on the rise regardless of future plans with AAPL.
In other Apple News: Activist investor Carl Icahn believes AAPL shares are selling at half price. Here's the full, unedited letter he wrote to the company this week...