Estero, Florida-based vehicle rental company Hertz Global (NYSE:HTZ) is in the middle of bankruptcy proceedings. Hertz stock is currently hovering at $1.25, down from the $16-level of January 2020.
Analysts are wondering if markets have become over-speculative in the post-coronavirus world. The debate in part centers around the increased day trading activity in the shares of companies, such as Hertz, that are in effect bankrupt.
Robintrack, which monitors interest in stocks held by Robinhood brokerage customers, has shown a surge in ownership in the stock in recent days. Therefore today, I’ll take a closer look at the group and discuss whether the shares should belong in a long-term portfolio. At this point, it is important to remember that Hertz stock is unlikely to recover in the coming months.
Covid-19 Claims Corporate Victims
According to research by Meghan Busse and Jeroen Swinkels of Kellogg School of Management, Northwestern University, “The American car rental industry was born on August 20, 1916, when Josiah Ellis “Joe” Saunders, an entrepreneur living in Omaha, Nebraska, ran a seven-line classified ad offering “Automobiles for Hire.” Saunders’s fleet consisted of one vehicle—a Model T Ford—that he rented for ten cents per mile.”
The car rental industry has experienced difficult downturns following the events of 9/11 as well as during the global financial crisis. But the coronavirus-lockdown and the ensuing economic contraction have become a major worldwide challenge for vehicle rental companies. The industry relies heavily on air travel as many customers rent vehicles at airports. As the level of business and leisure travel fell abruptly, so did car rentals.
Thus Hertz Global has become one of the victims of the coronavirus economic difficulties. The 102-year-old group operates Hertz, Dollar and Thrifty vehicle rental brands in approximately 10,200 corporate and franchisee locations around the world. Initially management announced temporary closures of almost 600 locations.
However, those measures were not enough and Hertz had to file for Chapter 11 bankruptcy proceedings in the second half of May. Chapter 11 will allow Hertz to operate while working out a plan to repay creditors. Its international operating regions including Europe, Australia and New Zealand were not included in those U.S. Chapter 11 proceedings.
Veronique de Rugy and Todd Zywicki of George Mason University conclude that the current difficult environment “is driving debt-laden companies such as … Hertz into bankruptcy.” As of the end of March, Hertz Global’s debt burden had gone over $18 billion. In return, the group had only $1 billion of available cash.
Bankruptcy Does Not Favor Investors in Hertz Stock
The uncertain environment faced by car rental companies is highlighted by yet another recent Chapter 11 filing. In late May, Advantage Rent A Car, a former subsidiary of Hertz also went bankrupt.
The U.S. Securities and Exchange Commission (SEC) clarifies what happens when a public company files for protection under the federal bankruptcy laws. It says “Bankruptcy laws determine the order of payment… Stockholders – owners of the company, have the last claim on assets and may not receive anything if the Secured and Unsecured Creditors’ claims are not fully repaid.”
In other words, in the coming months, current investors in Hertz stock are unlikely to be left with any shareholder value.
Prior to the bankruptcy announcement, Hertz stock was shy of $3. The next day, it was down to an intraday low of 40 cents, as would be expected.
Yet the past month has seen some rather unusual trading activity in the shares. For example, on June 8, HTZ stock hit an intraday-high of $6.25. But as I write, it is around $1.25.
InvestorPlace readers may remember that billionaire investor Carl Icahn used to be the largest shareholder in Hertz stock. On May 25, he sold his holdings, which represented a 39% stake in the car rental group, at an average per-share price of 72 cents.
I cannot help but wonder why speculators are now coming to a Hertz stock when a professional like Icahn has decided to get out of it completely. After all, he lost close to $2 billion in his overall investment in the shares.
Yet this kind of speculation around the recent bankrupt names has become somewhat of a weekly norm. Other names that day traders flock to include JCPenney (OTCMKTS:JCPNQ) and Whiting Petroleum (NYSE:WLL).
The Bottom Line on Hertz Stock
Investing in bankrupt names like Hertz stock in effect means wagering against a legal process that wipes out shareholders. For seasoned market participants, that would not be investing, but sheer reckless speculation. If you decide to play that daily game, it is important to appreciate the risks involved fully.
Market participants see price spikes in any one of these bankrupt names quite regularly. However, long-term investors would be best served if they did not include any of them in their portfolios. If you are a rather risk-averse investor who wants to invest for the long run, broader markets offer plenty of solid companies.
Tezcan Gecgil has worked in investment management for over two decades in the U.S. and U.K. In addition to formal higher education, including a Ph.D. degree, in the field, she has also completed all 3 levels of the Chartered Market Technician (CMT) examination. Her passion is for options trading based on technical analysis of fundamentally strong companies. She especially enjoys setting up weekly covered calls for income generation. As of this writing, Tezcan Gecgil did not hold a position in any of the aforementioned securities.