In a world of unprecedented events – such as oil prices briefly falling below zero – it’s hard to be shocked by anything anymore. However, the bankruptcy of Hertz Global (NYSE:HTZ) has been the subject of much discussion lately. Of course, that the rental car giant filing for bankruptcy protection was perhaps disturbing but not entirely unexpected. Rather, it’s what happened to Hertz stock afterward that has many scratching their heads.
As you might expect, the Monday after the big announcement, HTZ plummeted immediately to subterranean levels. At the time, the move – though devastating to long-term stakeholders – was completely rational. Essentially, when you declare bankruptcy, you’re admitting that your shares are worthless in their present form.
But shortly after Hertz stock closed below the $1 threshold, investor sentiment picked up. By June 8, HTZ was trading hands between $3 to $6, ultimately finishing the session at $5.53. It has since come down significantly from those levels. However, it begs the question – why are people even bothering with HTZ?
For one thing, the U.S. Bankruptcy Court for the District of Delaware approved the rental car company for selling up to $1 billion in stock – a highly unusual allowance. Second, the firm’s leadership team has stated bluntly that anyone buying Hertz stock is likely to lose everything.
That’s because common stock shareholders are the last in line when it comes to a company’s liquidation. In Hertz’s case, Thomas Franck of CNBC warns that HTZ “won’t be worth anything unless those with higher priority in a bankruptcy, such as the company’s debtholders, are paid in full.”
And that payment in full will only happen if the novel coronavirus situation turns around dramatically.
Hertz Stock Is the Ultimate Gamble
One of the first thoughts that many folks had as an explanation is Robinhood. A trading platform geared toward young investors, it’s possible that youthful exuberance pushed Hertz stock higher. Perhaps to some speculators, Hertz is too big of a global brand to fail.
However, Forbes’ contributor Amiyatosh Purnanandam questions whether the retail trading base is large enough to move Hertz stock. In addition, he argues that if irrational speculators are willing to drive HTZ to ridiculous levels, we should see sophisticated traders take the opposite bet. However, we don’t see them take what should be easy money.
Instead, Purnanandam states that the wild swings in valuation creates high uncertainty about the company’s assets and liabilities. In his opinion, this dynamic creates strong bargaining power for sophisticated investors.
It’s an intriguing argument and one that makes sense. Given the complexities involved in such a position, though, conservative investors should steer clear of HTZ stock.
If the wildness of the pricing dynamic wasn’t enough to dissuade you, you only need to look at the fundamentals. According to the Transportation Security Administration’s checkpoint data, the number of airline passengers picked up significantly this month. However, we’re still talking about an average capacity that is only 16% that of the year-ago level.
Simply, that’s not going to cut it for HTZ. Last year, when things were normal, Hertz stock returned 17.5% for shareholders. But that was largely because U.S.-China relations improved significantly in the back half of 2019. This shows that even in the best of circumstances, Hertz had a pedestrian business. At 20% capacity (or less), the company is courting disaster unless the situation improves profoundly.
HTZ Itself Is Pointless
Another reason why investors should avoid Hertz like the plague is that the stock sale is a “lose-lose proposition,” according to Barron’s contributor Alexandra Scaggs. She describes the ugly scenario in two succinct, cutting paragraphs:
If the share price declines sharply from here, the company won’t want to sell the full amount of stock. And if that happens, it may not have enough cash to finance its operations through bankruptcy, which could force it to rely on new costly debt financing, and the holders of that new debt would have greater claim on company assets than current shareholders do.
If Hertz’s share price holds up or even increases from here, the company will likely want to sell more stock through its agreement with Jefferies. And if it sells the full amount of stock allowed under today’s filing, that would significantly dilute the value of existing shareholders’ current ownership stakes.
I’d bring in a discussion about the economic vulnerability and how several companies are shifting toward teleconferences, thereby sharply cutting the business travel component of Hertz’s revenue stream. But if everything I’ve already mentioned about Hertz stock isn’t enough to convince you to take cover, nothing will.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare. As of this writing, he did not hold a position in any of the aforementioned securities.