Why Did Wolfspeed Stock Skyrocket 1,686.78% Today?

Key Points

• Wolfspeed is canceling its existing common stock and issuing shares of a new stock as part of its bankruptcy.

• Shareholders of its old stock will be severely diluted.

• Wolfspeed is slashing its debt, reducing payments by 60%.

• 10 stocks we like better than Wolfspeed ›

Shares of Wolfspeed (NYSE: WOLF) saw some unusual activity on Monday, appearing to finish the day up a whopping 1,686.78% as the S&P 500 (SNPINDEX: ^GSPC) and Nasdaq Composite (NASDAQINDEX: ^IXIC) gained 0.3% and 0.5%, respectively.

The chipmaker's previously issued stock was replaced with new shares today as part of its path to clear Chapter 11 bankruptcy. It's critical for investors to understand, however, that while the 1,686.78% rise in the listed price of Wolfspeed's stock is eye-popping, it's a bit misleading.

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Wolfspeed issues new shares

As part of its legal efforts to restructure and rid itself of billions in burdensome debt, today, Wolfspeed canceled all of its existing shares and issued shares of its "new" stock, helping the company satisfy its creditors. The majority of the new stock will be awarded to those the company is indebted to, while shareholders of its common stock will receive a maximum of 5% of the new shares.

That process will continue, but today, Wolfspeed issued just under 26 million shares at an exchange ratio of just 0.0084. That is a severe dilution and a perfect illustration of why many retail investors get burned when dealing with companies on the verge of bankruptcy.

Image source: Getty Images.

The new shares are trading under the same symbol, creating some confusion. It appears that the market data used by many websites to calculate price movements hasn't been updated to reflect some of these changes -- including the significant reduction in shares available to trade. That makes the 1,686.78% rise in the stock's listed price misleading. When accounting for the change in shares, the jump was closer to 200%.

I would stay away from Wolfspeed stock until the situation comes to an equilibrium. More shares will be issued in the coming days.

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Johnny Rice has no position in any of the stocks mentioned. The Motley Fool recommends Wolfspeed. The Motley Fool has a disclosure policy.