Hertz (OTCMKTS:HTZGQ) filed for bankruptcy earlier this year. It failed due to a combination of the novel coronavirus, poor corporate strategy, and excessive leverage. However, despite the company going bankrupt many months ago now, Hertz stock is still a surprisingly popular holding among traders.
The truth is, though, that shareholders have a bad case of sunk cost fallacy at this point. A sunk cost is something that you’ve already invested and can no longer be recovered.
In economics, teachers advise ignoring sunk costs because it clouds your thinking. In the case of Hertz stock, people are holding onto it in hopes of some miracle occurring that will allow shares to go back up to breakeven. But it’s simply not going to happen.
In fact, Hertz isn’t even a long shot at this point; it’s closer to a lottery ticket that’s already been scratched off.
The math here is simple: when Hertz’ bankruptcy reorganization wraps up, the current class of Hertz stock will be canceled and hold no residual value. Zero. That’s how much Hertz shares will be worth if you keep holding them indefinitely.
A Closer Look at Hertz Stock
As mentioned above, sunk costs don’t matter — Hertz is never going back to where it traded pre-pandemic. For shareholders, there’s either the option to recover part of one’s capital by selling now, or taking a 100% loss when the bankruptcy process concludes.
You might be wondering why Hertz stock is trading well above zero given the above, or why it’s still making news at all. It largely stems from an important misconception.
Part of the reason why HTZ stock has presumably rallied recently is that the operating company is making new business dealings. For example, last month, Hertz secured $4 billion in new loans from private equity. It will be using those loans to purchase as many as 229,000 new vehicles to keep its fleet inviting for customers.
You might look at that and think Hertz is back. The vaccines are on the way, business travel should recover in 2021, and now Hertz is getting its fleet ready to take advantage of the recovery. So the coast is clear for Hertz stock, right? Not so fast.
Read the press release carefully, and you’ll see that Hertz isn’t directly buying the new vehicles with its own cash. Rather, it is putting money into an off-balance sheet structure along with money coming from lenders. This structured fund will buy the cars and serve as collateral in case the deal doesn’t work.
Why use all these complicated maneuvers instead of simply buying the cars outright within the parent Hertz corporation? Because Hertz is bankrupt, that’s why.
In order for anyone to give Hertz more money, they need specially-structured deals to ensure their capital is safe. In fact, the risk in this deal — if the 229,000 cars aren’t deployed profitably — goes to existing Hertz lenders.
As the Hertz press release concluded, a bankruptcy court would have to sign off on the deal, since it puts other creditors at risk.
No Impact to the Stock
We’re not talking about Hertz stock here at all, and there’s good reason for that. It’s not even part of the picture. Hertz has filed its bankruptcy reorganization plan, and it appears to be on track and going as scheduled.
It’s great that Hertz is making plans to renovate its fleet. Presumably people will still need rental cars once the economy is up and running again. And, additionally, Hertz employs a large number of people; it’s great if this succeeds and everyone gets to keep their jobs.
None of this matters to HTZGQ stock now, though. Hertz’s shares will be done away with as part of the bankruptcy reorganization.
In fact, a large part of the fact that Hertz can borrow more money to buy additional vehicles is because prior owners of the company — such as Hertz shareholders — have been cut out of the picture.
Hertz Stock Verdict
As 2020 is drawing to a close, so too is this strange interest in bankruptcy stocks. In a matter of weeks, soon-to-be defunct stocks like Chesapeake Energy (OTCMKTS:CHKAQ) and Hertz should finally head toward zero as they near cancellation.
Traders have had a fun ride flipping shares in these companies, but know when to get out. The music is about to stop for Hertz stock, and you don’t want to be left with a position when shares are no longer trading.
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.