After declaring bankruptcy, the stock price of the car rental company Hertz spiked around 700%. How it happened, and what is it telling us about the current markets?
An American car rental company, Hertz Global Holdings Inc., is going through bankruptcy proceedings, and it’s on the verge of being delisted from the New York Stock Exchange, which will most likely wipe out its entire share value.
Being fully aware of the risk, the U.S. Bankruptcy Court has decided that Hertz may sell up to 246.8 million unissued shares(Techcrunch, 2020). Then following this unusual decision, Millennials’ highly popular commission-free trading app Robinhood saw a massive spike in demand to bankrupt Hertz stocks!
In other words, the markets now officially gone crazy!
After seeing the $0.78 bottom on June 3, the stock went almost 700% up just in 5 days and saw the value of $6.25 per share on June 8. While none of the fundamental metrics highlight the possibility of any return from the company’s catastrophic end, some investors see value in this stock and put all their money in it for some reason.
While trying to understand who these people are, Robintrack, which is a data visualization platform aiming to track Robinhood movements and show the number of people holding the asset vs. its price, updated their metrics and confirmed that it’s not one or two institutional investors that are driving the price. Still, approximately 170,000 retail investors see this collapse as an opportunity.
These are the numbers just from one retail trader app, and there are tons of others out there who pretty much host similar investor profiles, so it’s more than fair to expect a similar situation in other apps as well.
Bloomberg’s famous columnist Matt Levine has also brought up this topic in one of his latest articles and mentioned a 23-year-old salesman in San Francisco, Thai Gaon, who bought 35,000 Hertz shares on June 4 at $1.43, spending a little over $50,000 and said it was his life savings (Levine, 2020)
Can this spike of demand for their stocks save the company?
Like a self-fulfilling prophecy, investors who think that Hertz may turn the wheel around may be funding the company on rainy days and helping its rescue mission. However, the company only had 1 billion dollars of cash in hand, which is expected to be entirely spent until the bankruptcy proceedings come to an end.
Another 1 billion dollars of liquidity coming from retail investors would provide some fresh air to the company. However, it is still a significant risk, considering that no one can guarantee an imminent return to pre-COVID-19 car rental demand soon. Also, shortly after seeing the top, the stock has fallen back around $1.80 per share, so the real benefits of surreal stock valuations to the company is open to discussion. If it was just public investors exchanging the stocks in hands, the actual financial contribution to Hertz must have stayed quite limited.
How will the company manage the process? Is it going to be delisted from the New York Stock Exchange? If such a return is possible, why is there no news of institutional investors coming into the play to bail out the company?
These are all the questions, acting as a multiplier to the risk factor to investing in Hertz. However, the problem is not limited to them, and one of the biggest threats here is this behavior to be a common practice. If companies will rely on irrational public traders to play gamble on their stocks to provide the needed cash, it’s possible for many traders to be poorly hurt from this toxic relationship in the long term. Retail investors missing the opportunity Hertz has presented will try to catch a falling life the next time a publicly-traded company announces a possible bankruptcy.
Looking at the bigger picture
We’re living in strange times where a hedge fund manager’s short trade may have been liquidated by a bunch of millennials through their commission-free apps. It wouldn’t be fair to claim that institutional investors were always rational. They also were making decisions based on their gut feeling, even when the data told otherwise.
Especially after the massive collapse of Long-Term Capital Management in 1998, the dot-com bubble at the end of the 90s, and 2008 Financial Crisis, we saw that markets lose their rational grounds from time to time. However, these crises were experienced despite their knowledge and not because of it. Therefore, the current outlook resembles more of a tulip mania than slightly overvalued financial markets.
It’s always important to reflect on past mistakes and avoid the same slips as much as possible.
Trade responsibly!
Originally published at Medium on June 20, 2020.
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Disclaimer: This article is provided for informational or educational purposes only and is not any form of individualized advice. Use this information at your own risk.
References
https://www.bloomberg.com/news/newsletters/2020-06-12/money-stuff-if-you-want-hertz-have-some-hertz
