Less than seven weeks after Hertz Global Holdings (NYSE:HTZ) filed bankruptcy, HTZ stock is still trading. Not only are those bankrupt shares still changing hands, but in huge volumes, driving the stock price as high as $5.53 on June 8. Why?
I sort of understand why traders might like to speculate on the fate of the corpse. The company owned nearly 500,000 cars, and courts must decide what happens to the fleet. A used car dealer, like CarMax (NYSE:KMX) or AutoNation (NYSE:AN), might like to take those cars, and throw in something for the Hertz name.
But Hertz had just $1.4 billion in cash on its books at the end of March, and $1.84 billion in debt beyond the capitalized leases on its fleet. Reports have the cash balance down to as low as $365 million by the end of June.
That’s why companies go bankrupt. They can’t pay their bills.
Blame the Kids
As with almost everything else wrong with today’s market, the Hertz zombie saga is being blamed on “Robinhood” traders. These are (mostly) young people using the Robinhood app who often take positions at night. There are over 13 million of them.
Critics say Robinhood turns investing into a game, and with no commissions to pay, the kids are in over their heads. The number of Robinhood accounts with shares of Hertz quadrupled from 43,000 before the bankruptcy to as many as 171,000 in the middle of June. That June 8 $5.30 a share was a post-bankruptcy filing peak.
It wouldn’t take much to move the stock. On July 7, Hertz’ market cap was just $208 million. It would have been no higher than $1 billion at its post-bankruptcy peak. So if 128,000 new investors had piled in it could have propped up the stock. For a while. But they’re burned now. Some may never trade again. Others will have learned a lesson. (“But, dad, all of my friends were doing it…“)
Professional brokers have taken to looking at stocks popular on Robinhood as a contra-indicator. That is, if the kids like it, the stock must be garbage. It’s like looking at a high short interest as a reason to buy a stock, despite its fundamentals. Even after climbing to nearly $1,400 per share, 25% of interest in Tesla (NASDAQ:TSLA) is still short. It’s why I never play that game.
Every young investor makes mistakes. I lost money on Apple (NASDAQ:AAPL) back in the 1990s, selling out just before Steve Jobs began working his magic. In time, you learn, you improve, and so do your results. I’m here for that.
The stock market wasn’t the only thing riled by the Hertz bankruptcy.
The used car market was also hit. Cars that are identified as being in the Hertz fleet are trading at an average discount of 12% to their pre-bankruptcy market value. If you just decided you need to sell your Toyota (NYSE:TM) Tundra this month, you’re getting less for it than in May, because of Hertz.
It means that whoever gets control of the inventory has a delicate balancing act. Selling the cars quickly floods the market. Selling them slowly risks their deterioration. Taking cash quickly gets the cars off Hertz’ books, but doesn’t get back the money creditors are owed, let alone leave anything for investors in liquidation.
The Bottom Line on Hertz Stock
The only reason to speculate on Hertz stock is the hope that its Chapter 11 doesn’t become a Chapter 7 liquidation.
With coronavirus cases rising, especially in big states like Arizona and Texas where people rent a lot of cars, that hope is dissipating quickly.
If you’re a young trader and took 200 Hertz shares near their post-bankruptcy peak, say around $5, you’re currently sitting on a loss of $700. Take the hit, learn from it, and sin no more. Because that other $300 is likely to disappear as well.
Dana Blankenhorn has been a financial and technology journalist since 1978. His latest book is Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, essays on technology available at the Amazon Kindle store. Write him at firstname.lastname@example.org or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in AAPL.