Earlier this year, Hertz Global (NYSE:HTZ) was one of the names that rose to infamy/notoriety as the Robinhood crowd became enamored by tumbling, low-priced stocks in the hopes of catching rallies, however brief.
Indeed, there were some occasions when this risky strategy paid off. There was stretch in March when HTZ stock doubled and another in June when it posted a roughly five-fold gain.
However, the warning to aspiring traders that can’t focus on positions all day is that Hertz notched those moves in a matter of days only to give it all back in breathtaking fashion. After trading above $5 in mid-June, Hertz is on life support at just over $1.
Indeed, the car rental firm is on life support because it’s in bankruptcy and it’s a thorny process for the company. It’s seeking $1.5 billion in debtor-in-possession financing because a bankruptcy judge ruled Hertz can’t raise capital by selling equity while in bankruptcy proceedings.
That’s probably for the best. After all, there are only so many Robinhood traders to absorb new supply of Hertz equity.
Redemption Won’t Come Easy for HTZ Stock
Hertz is a movie markets tend to replay over and again with different companies. Novice investors, undeterred by bankruptcy, embrace low price tags because they can cheaply acquire larger amounts of shares while ignoring flimsy underlying fundamentals.
Aside from the aforementioned $1.5 billion debtor-in-possession financing Hertz needs to have any shot at survival, the company is also shopping for $400 million to keep its fleet stocked with new cars. If Hertz was a financially solvent company in a normal operating climate, raising capital or borrowing cash to refresh its fleet would barely register with investors.
However, 2020 is anything but normal. Hertz and its peers, just like airlines and hotels, are heavily dependent on business and leisure travelers, many of which are currently staying home because of the novel coronavirus pandemic. Conventions are being postponed or canceled while many tourists are opting for closer to home destinations or activities such as camping that don’t necessarily require renting a vehicle.
Underscoring the impact Covid-19 is having on car rental companies is Disney (NYSE:DIS). Travelers to Disney World in Florida and Disneyland in California are major sources of business companies like Hertz. However, Disneyland remains shuttered and Disney recently announced 28,000 layoffs, most of whom are theme park employees.
All of that is to say sometimes investing isn’t as difficult as it’s portrayed, meaning why buy shares of bankrupt car rental company when it could be two or three years before travel capacity levels look like they did in 2019?
Beware Supposed Catalysts
Unfortunately, Hertz has other avenues for luring unwitting investors. For example, it’s planning to sell some of the older cars in its fleet to trim its debt burden, but this will only be noteworthy if it can sell more than $400 million worth of product to offset that amount it’s looking to borrow to spruce up its fleet.
Second, there’s talk that private equity firms TPG and Onex Corp. are mulling bids for Hertz’ Donlen leasing business. Reportedly, those entities value that unit at around $1 billion. That’s roughly 6x the company’s market capitalization of $173.39 million.
However, this transaction, assuming it comes to fruition, doesn’t represent value for Hertz shareholders. Selling a business for $1 billion should be well-received except when the seller is carrying a debt burden of $24.4 billion as is Hertz.
With HTZ stock, red flags are abound. The company operates in a challenged industry with a multi-year timeline to recovery and is drowning in debt. Investors can find better lottery tickets elsewhere.
On the date of publication, Todd Shriber did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Todd Shriber has been an InvestorPlace contributor since 2014.