Morgan Stanley analyst Adam Jonas lowered his base case price for Hertz (NYSE:HTZ) on June 22 to $0 from $2 a share. This shouldn’t come as a surprise to anyone who follows bankruptcy proceedings. But for those silly enough to buy Hertz stock speculating shares would survive Chapter 11, this is the final nail in the car company’s coffin.
When I saw the news that Hertz wanted to sell $1 billion of its stock to unsuspecting investors, it made me think about how broken the markets have become. Thankfully, it appears the Securities and Exchange Commission stepped in to ensure a travesty isn’t committed against unwitting potential buyers.
Quite simply, the Hertz case is the modern-day version of “I’ve got some Florida swampland to sell you.” It’s a sad commentary on the markets and society in general. Here’s why.
Markets Are Too Frothy
According to a recent survey by Bank of America, a record 78% of fund managers believe stocks are overvalued. This is the highest level of respondents suggesting the markets are overheated in the 22 years BofA has conducted the survey.
“[T]he survey also reveals fund managers think the current optimism in markets is fragile and only 18% think there will be a V-shaped economic recovery,” reported Shares magazine contributor Yoosof Farah on June 16.
“Most (64%) think the recovery will be either U-shaped or W-shaped, and while 37% now believe we’re in a bull market, 53% majority still think it’s a bear market rally, with the biggest tail risk remaining a second wave of coronavirus infections.”
A Cautionary Note Is Sounded
An even better examination of what’s happening to the markets in recent weeks was penned by Wolf Street’s Wolf Richter. His June 19 post illustrates why now is not the time to be brave with your investments.
Richter is so convinced that the rally is going to come crashing down to earth that he has shorted the SPDR S&P 500 ETF Trust (NYSEARCA:SPY). He plans to keep the trade alive for several months. His reasoning is sound.
“And now the market, immensely bloated and overweight after its greatest 50-day rally ever, has to stand on its own feet, during the worst economy in my lifetime, amid some of the worst corporate earnings approaching the light of the day, while over 30 million people lost their jobs. It’s a terrible, gut-wrenching scenario all around,” Richter wrote June 19.
To illustrate how crazy things are, let’s go back to BofA analyst Adam Jones and his latest thoughts on Hertz.
“We are now more concerned that there is a potential risk of a NYSE de-listing, or potential liquidity shortfall where the company may exhaust available cash to run the business by the end of 2020, potentially leaving the equity with little or no residual claim,” Jonas wrote in his June 22 note to clients.
It’s incredible to me that an analyst could, in good conscience, suggest that Hertz had a pathway to survival that kept equity shareholders in the game. On June 11, talking about JCPenney (OTCMKTS:JCPNQ), I suggested that if billionaire Carl Icahn took a $1.6 billion loss on Hertz, there was no hope the equity shareholders would see any value for their shares post-bankruptcy.
Hertz Stock Speculation
A June 17 article from The Associated Press highlights some of the silly things individual investors are doing with Hertz stock.
In one case, AP reports on a delivery driver from Los Angeles who used his stimulus check to invest $1,000 in the rental car company’s stock. That illustrates how wasteful the one-time check to every American could be. It’s unconscionable.
Don’t get me wrong. I believe the democratization of Wall Street with low-dollar investment apps is good for investors. However, the easier it is for Main Street to invest, the easier it is to make mistakes.
Axios wrote an excellent piece on June 22 that suggested retail investors are beating the pros by taking lessons learned from past market corrections and adapting to today’s conditions. Heck, everyone roots for underdogs. I sure do.
The Risk With Hertz Stock
Getting back to the AP article about Hertz, here is what one investor said about buying its stock:
“I invested not only in a sense of capitalizing, but actually want to be a supporter of Hertz. I’ve always had good business with them and their community efforts. So it’s something that I would like to see to stay around for the years to come,” said 33-year old airport security worker Sherrie Hardy. “We all know, when we get into the stock market, it is a gamble of some sort.”
First, I’d like to think Hardy made the second statement believing what she said about investing is a gamble. However, looking back on how investors felt after the 2008 correction, it’s unlikely she’s fully grasped the risk taken with Hertz.
Secondly, and equally important, is the fact fractional share purchases mean investors can invest in companies with healthy balance sheets. These include Apple (NASDAQ:AAPL) or Amazon (NASDAQ:AMZN). Investors don’t have to throw it away on Hertz.
Another Use of Fun Money
Here at InvestorPlace, we’ve started covering equity crowdfunding investments. My suggestion to people like the two mentioned above is to study private investments from platforms such as Wefunder and Republic.
Once you’ve got a better understanding of how they work, put some “fun money” into one or two that you want to support, and ride along for the show.
In the end, you likely won’t end up in a worse position than owning Hertz stock.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.