We’ve been here before with Hertz (NYSE:HTZ). Hertz stock has soared, and at least some investors see upside.
But do you remember the past rallies in the stock? They’ve all fizzled. Notably, the company traded under $1 after it declared bankruptcy in May. Then by June, the stock was above $5. Yet, within weeks, essentially all of those gains were lost.
You can go back further as well, to before the bankruptcy filing and the novel coronavirus pandemic. Hertz stock rallied in February, touching $20 and a two-year high. In 2016, the stock reached $45, not long after Hertz split in two. But all along, investors who chased HTZ stock regretted doing so.
Certainly, the fact that HTZ is below $2 has something to do with the pandemic. But it also has a lot to do with other factors. The company took on far too much debt — more, in fact, than the business and its fleet are now worth.
That’s why Hertz went bankrupt — it was pushed. And it’s why this rally in Hertz will end up just like the previous ones: with investors disappointed.
Why Is Anyone Buying Hertz Stock?
To be fair, it’s too simplistic to say that the company is bankrupt and therefore Hertz stock is worth nothing. Equity holders — on occasion — can get some value in a reorganized company.
But I don’t think that’s been the thesis behind the moves in HTZ since its filing. After all, if there was real value in the equity, Carl Icahn likely would know about it.
Icahn is one of the most legendary investors of all time, and was Hertz’s biggest shareholder as recently as May. But following the Chapter 11 filing, Icahn exited his entire stake below $1, taking a nearly $1.6 billion loss in the process.
On the other hand, some investors simply seem to enjoy gambling with Hertz. In the past, I’ve dubbed this the “Robinhood effect.” The point of trading HTZ stock, it seems, isn’t to make money over the long haul. It’s to buy with the hopes of getting a higher price.
On occasion, that strategy has worked. It’s not going to forever, though. This is a company with nearly $20 billion in debt. Its cars aren’t worth that much — and even if they were, Hertz isn’t going into a liquidation.
The business isn’t worth that much, either. Not in a pandemic, and not with travel likely impaired for the long term as well as intense competition with ridesharing companies.
There simply isn’t much, if any value, in Hertz’s equity. Maybe — maybe — shareholders get a small piece of the smaller reorganized company if and when Hertz exits Chapter 11. But even that’s not guaranteed — and it seems like the only way the stock has any value at all.
A Giant Misunderstanding
Despite these warning signs, at the moment some investors appear to disagree. This is thanks to a big piece of news this month — on Oct. 16, Hertz announced that it had received $1.65 billion in debtor-in-possession (DIP) financing. Hertz stock jumped 143% on the news.
But the only way that move makes sense is if it means Hertz has a chance to exit bankruptcy with equity intact. However, it looks like the exact opposite will happen.
DIP financing allows the company to raise cash to manage through the bankruptcy process. The lender, meanwhile, gets first priority on the company’s assets, which creates the incentive needed to loan money to a company already unable to pay all of its debts.
The DIP loan does not change the Hertz story one whit. Slowly, investors seem to be figuring that out. Hertz stock has dropped more than one-third since that big one-day rally. And while Hertz is still up 59% since the financing was announced, that fundamentally makes little sense.
Again, to at least some traders, Hertz stock isn’t really about the fundamentals. It’s a trading vehicle and little more.
But what’s curious about that interpretation is that there are literally thousands of other stocks out there to trade. And while few have the same volatility as HTZ, there are plenty that have already made big moves and have more in their future.
Those stocks also often have huge, high-reward long-term cases. Investors now can literally own a spaceship company. On top of that, there are electric vehicle manufacturers and suppliers whose technologies could underpin a revolution in the automotive industry.
There’s 5G. There’s cannabis. And all of those sectors aside, there are no shortage of cheap stocks looking to manage through the pandemic — with promises of a great pay-off, if they’re successful.
Investors can trade those stocks and own stocks that have long-term potential, too. So why, given all of the options, should you choose a bankrupt car rental company whose glory days are long gone?
Any investor considering Hertz stock should really ponder that question. Personally, I don’t think there’s a reasonable answer at all.
On the date of publication, neither Matt McCall nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in the article.
Matthew McCall left Wall Street to actually help investors — by getting them into the world’s biggest, most revolutionary trends BEFORE anyone else. Click here to see what Matt has up his sleeve now.