Wolfspeed Soared Again Today -- Is the Stock a Buy?

Key Points

• Wolfspeed stock skyrocketed yesterday after the company announced its next CFO, and the rally continued today.

• The silicon carbide specialist is moving forward with a Chapter 11 bankruptcy and restructuring that could leave current shareholders with very little value.

• Wolfspeed stock could see more upward momentum in the very near term, but the outlook further out isn't promising.

• 10 stocks we like better than Wolfspeed ›

Wolfspeed (NYSE: WOLF) stock closed out Tuesday's trading with another day of big gains despite retreating from its intra-day high. The company's share price gained 9.1% in the daily session, but it had been up as much as 44.2% earlier in the session.

Wolfspeed stock saw a massive rally in Monday's trading after it was announced that the company had selected Gregor van Issum as its next chief financial officer, and the bullish momentum continued in today's trading. While there wasn't any fresh news powering the sustained rally today, investors continued buying into the stock in hopes of additional gains. There may be different strategies at play here.

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Van Issum will be leading the company through its Chapter 11 bankruptcy filing and restructuring, and some investors may be hoping that he'll be able to arrange terms that work out for the silicon carbide specialist's current shareholders. Meanwhile, some investors may be hoping that the stock continues to rally in the near term as other investors who have sold shares short move to cover their positions.

Is Wolfspeed stock a buy right now?

As part of its Chapter 11 bankruptcy and restructuring, Wolfspeed's current corporate entity will be effectively disbanded, and a new company built around its assets will be formed. The transferring of assets and new company formation will allow much of Wolfspeed's debt to be cleared and its core silicon carbide manufacturing operations to continue under the leadership of the new company.

Through the deal, current common stock shareholders will only receive in the new company between 3% and 5% of the new company's common equity. So while it's possible that current shareholders could see their positions increase above current levels if the new company receives a relatively high valuation, it doesn't seem to be a likely outcome. Short covering and meme-stock momentum could help push shares even higher in the near term, but the risk for investors is very high here.

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Keith Noonan has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Wolfspeed. The Motley Fool has a disclosure policy.