Car and equipment rental company Hertz Global (HTZ) dropped a bombshell last Friday, announcing that it will have to redo its financial statements for the last three years. As one might imagine, this led to a big selloff in Hertz stock on a massive spike in volume.
Active investors and traders would be best-served by staying away from HTZ stock on the long side for the time being. Let’s look deeper into why.
Hertz showed in an SEC filing that its 2011 financial statements, as well as its 2012 and 2013 numbers, should not be relied upon for accuracy. As a result, its first-quarter earnings announcement, scheduled for the end of June, will be delayed.
HTZ blamed this finding on weak internal controls over its financial statements, which now begs the question whether outside authorities need to have a closer look at the company’s finances as well.
One of my first mentors used to tell me that there is no better reason to stay away from a stock, or short it, than when accounting irregularities are being announced. While it will make some difference whether these irregularities were self-declared or as a result of an inquiry/investigation by authorities, neither is confidence-inspiring for investors, and most of the time, this isn’t a problem that just goes away overnight.
Hertz Stock Charts
Looking at the longer-term weekly chart of Hertz stock, we note the particularly sharp rise in 2013, which ultimately also led to a breakout past lateral resistance dating back to 2007. The breakout attempt past the $27-$27.50 area, however, has been choppy, and this now has me wondering if it might not have been a fake-out move.
However, since we can’t know this until after the fact, I’m just raising the question for now as a red flag for bulls looking to blindly buy into last Friday’s selloff.
On the daily chart, note last Friday’s breakaway gap (lower) and the big spike in volume. Hertz stock usually trades around 5 million shares per day, but last Friday saw almost 43 million shares change hands.
In the bigger picture, HTZ still remains in its uptrend and in a constructive posture, but given last Friday’s news of accounting irregularities, even long-term investors will find it difficult t0 buy this dip in Hertz stock considering what might have changed to the premises of their analysis.
More than anything, however, this current situation brings about plenty of uncertainty around Hertz, and as a result, this will affect investor confidence in its stock price.
Quicker traders and investors could consider trying Hertz stock from the short side down to the 200-day simple moving average (red line), currently near $26. However, blindly buying into last Friday’s selling is a low-probability trade.
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Download Serge’s trading plan in the Essence of Swing Trading e-book here. As of this writing, he did not hold a position in any of the aforementioned securities.