Can Hertz (NYSE:HTZ) pull out of its tailspin? The company was an early victim of the novel coronavirus. Facing an avalanche of debt and the prospect of minuscule revenues for 2020, Hertz filed for bankruptcy. Normally that’d be the end of the story for Hertz stock.
But instead, traders have remained fascinated with the car rental outfit. The company made a particularly interesting move earlier this summer, when it briefly tried to issue more stock while in bankruptcy.
Though that plan was ultimately shot down, HTZ stock still is holding a significant bid despite being in bankruptcy. Is there something going on here out of the ordinary? Or are people simply not willing to take the loss on what is likely to end up being a worthless security? Read on.
Stock Sale Didn’t Change Anything
If you recall, Hertz stock spiked a few months ago, after it had filed for bankruptcy. At that point, shares ran up so much that it appeared Hertz might be able to save itself. To do so, it planned to sell more stock to the public.
This invoked famed investor George Soro’s idea of reflexivity. If enough investors believe something, it can in fact change reality. Perception and economic fundamentals can work in a positive feedback loop. If folks thought Hertz would survive, it could have allowed the company to raise enough money to actually pay its debts.
That was the idea anyway. And Hertz, contrary to the popular perception, did actually manage to sell some stock. In an SEC filing, Hertz disclosed that it sold almost 14 million shares of stock, raising $29 million. At that point, the company was ordered to suspend the stock sale, and so it was unable to bring in anything close to the intended $500 million.
However, the novel share sale plan did work to at least a small degree. Up until that point, it was almost unprecedented that a company in bankruptcy could issue more stock to the public. Hertz’ creativity there is worth noting. However, let’s be frank: $29 million isn’t going to do anything to change the game given Hertz’ massive debts.
Things Are Winding Down
The $29 million immediately pales in comparison when you realize that Hertz lost more than $500 million last quarter, and recently aimed to borrow more than $1 billion in additional funds to maintain its (much-reduced) level of service.
Seemingly that wasn’t enough, as Hertz is now selling off a large part of its vehicle fleet as well. People expecting a recovery to pre Covid-19 levels are simply misguided. Once you start selling off the fleet, obviously the situation has deteriorated.
Some traders hope that Hertz stock may retain some value like Whiting Petroleum (NYSE:WLL) did in its recent bankruptcy filing. There, old stockholders got 3% of the newly-reorganized company. Even so, shareholders that held through the bankruptcy reorganization lost the substantial majority of their funds. And that was a “good” outcome for a bankruptcy. More often than not, common shareholders don’t get anything.
With Hertz failing to raise sufficient funds, that seems like the likely outcome here as well. Any hopes of a recovery involved air travel (the prime driver of rental car demand) coming back quickly.
Instead, the air recovery is taking forever, particularly with the government not continuing to offer the same level of support for the airlines that it did earlier in the pandemic. All in all, things are not shaping up well for Hertz operationally, and that reduces the already dim chance of a comeback.
Hertz Stock Verdict
Carl Icahn lost more than a billion dollars on his Hertz investment. Icahn is an expert at turning around difficult situations. If there had been anything to salvage here, he’s exactly the right sort of guy for the job. Instead, however, he accepted his fate on this one and moved on to better opportunities.
Traders should strongly consider doing the same. The odds of Hertz managing to turn things around without wiping out common stockholders is low. And even if equity holders do end up getting scraps, like with Whiting, it will probably be at a much lower valuation than Hertz still trades for today.
I know folks want to play the Covid-19 recovery trade as the virus is now seemingly in decline within the U.S. That’s reasonable. But please pick your vehicle of choice carefully. Bankrupt equities are almost always the wrong decision.
On the date of publication, Ian Bezek did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek.