When the formerly successful car-rental company Hertz (NYSE:HTZ) announced in May that it had filed for bankruptcy, that should have been the end of the discussion for Hertz stock bulls. That was their cue to close up shop, admit that it’s a failed company and go home.
But as we now know, they didn’t go home. Or maybe they stayed home because of the novel-coronavirus lockdowns, but they certainly didn’t stop trading Hertz stock. If anything, the bankruptcy announcement induced an almost inexplicable spike in trading volume on the stock.
In a weird phenomenon that social-media pundits are called the “bankruptcy trade,” shares of failing companies like Hertz, J. C. Penney (OTCMKTS:JCPNQ) and Whiting Petroleum (NYSE:WLL) have attained celebrity status among a growing crowd of thrill-seeking traders.
Let it be said, though, that Hertz stock has indeed printed some bright green candlesticks on a mostly dismal chart. So, could the buyers be on to something here? Or are they just heading for a massive car crash?
A Closer Look at Hertz Stock
If anything, the price action in Hertz stock shows that it’s not your grandfather’s stock. The shares have lost the majority of their value on almost any time frame. Yet, it’s a gambler’s paradise because daily share-price gains of 30%, 40% or more have been witnessed since the declaration of bankruptcy proceedings.
There are no dividends to collect, so share-price appreciation is everything here. Traditional metrics like price-to-earnings ratio also don’t apply here as the company is bleeding capital.
So if you can’t make heads or tails of Hertz stock, you’re not alone. On a day-to-day basis, traders are basically rolling the dice with this stock. And as for anybody who’s thinking about a buy-and-hold strategy, please bear in mind that bankrupt companies are frequently subject to being delisted at some point.
It should come as no real surprise, then, that the New York Stock Exchange did, in fact, issue a delisting notice to Hertz. An appeal has reportedly been filed by Hertz, but traders shouldn’t hold their breath waiting for a happy ending to this ongoing tragedy.
The Fall of an Industry Icon
It’s amazing to consider that Hertz once thrived in the American car-rental business. Granted, the onset of the coronavirus took a toll on the economy. Still, Hertz seemed wholly unprepared for a shock like this.
At the bankruptcy-filing announcement, Hertz seemed to shift the blame away from itself and entirely onto the coronavirus. Thus:
“The impact of COVID-19 on travel demand was sudden and dramatic, causing an abrupt decline in the company’s revenue and future bookings… [U]ncertainty remains as to when revenue will return and when the used-car market will fully re-open for sales, which necessitated today’s action.”
But Avis Budget Group (NASDAQ:CAR) isn’t bankrupt, so Hertz’s excuse rings hollow. Nonetheless, the daily trading volume on Hertz stock is still in the millions. Will people never learn?
Descent into Worthlessness
Apparently, some folks have yet to learn the fundamentals of cautious investing. Sadly, there are people who will continue to buy Hertz stock even though it’s at risk of being delisted and/or going to $0.
And Hertz is only encouraging this behavior, it seems. Believe it or not, the company was recently approved to issue as much as $1 billion worth of new stock shares.
Even Thomas Lauria, Hertz’s lawyer, admitted that the shares “might ultimately be worthless.” If it makes Hertz’s investors feel any better, though, Lauria added that “it’s impossible to know this as a point of certainty.”
The Takeaway on Hertz Stock
Lauria’s backpedaling shouldn’t console or encourage anyone trading Hertz stock. Informed, rational investors would do best to avoid it altogether. Otherwise, you could soon be facing bankruptcy too.
As of this writing, David Moadel did not hold a position in any of the aforementioned securities.