Hertz goes brrrrrrrrrrr. Is there a crash coming?
There has been one company we haven’t stopped talking about at DD over the past few days: Hertz.
Quick recap: DD took a look at the car rental company a couple of weeks ago when it announced that it was filing for bankruptcy. That made sense. Hertz has a $19bn debt pile, $15bn of which comes from debt in the asset-backed securities market that is backed by its fleet of cars.
Coronavirus has dealt a huge blow to Hertz’s business. Few people are travelling or renting cars and the company can no longer afford to service its debts.
Even legendary investor Carl Icahn, who was Hertz’s largest shareholder, threw in the towel and decided to dump his stake in the company at a more than $1.5bn loss. After all, what’s the point in holding equity in a company that is going through bankruptcy protection when you will almost certainly be wiped out?
Let’s ask some Robinhood traders. If you haven’t come across the app before, Robinhood allows retail investors to easily trade stocks. Its 10m users have become the go-to answer for any sort of irrational moves in markets. Here’s our Lex column on the app.
Remember when Tesla’s stock price more than doubled in the space of a few short weeks for no obvious reason? A lot of people pointed the finger at Robinhood users.
Hertz filed for bankruptcy on May 22. Its stock price tanked to about 40 cents. Yet, since it filed for bankruptcy, Hertz shares have been on a tear, rising 675 per cent to $4.50.
Hertz shares are trading higher now than before the company declared itself bankrupt. To be clear, Hertz is still very much bankrupt.
“This is insane” or “the markets have gone mad” are some of the phrases we’ve seen banded around by people who are truly baffled by so-called zombie companies rallying.
Hertz might be the most well-known but Robinhood users have also helped to resurrect the likes of JC Penney (bankrupt), Whiting Petroleum (also bankrupt) and Chesapeake (almost bankrupt). The chart below shows how much these stocks had rallied by Tuesday.
Now DD isn’t here to give financial advice. But if someone like Icahn, who has made billions of dollars as an investor, chooses to exit a company at a huge loss for fear that its stock price could go to zero, it’s probably wise to stay away. There’s a reason people like him are called “smart money”.
That being said, stocks have erased all their losses over the past three months and made a roaring comeback despite the fact that we’re still in the midst of a global pandemic, millions are unemployed and there is social unrest in two of the world’s big financial centres.
Maybe the best way to describe the markets is: ¯\_(ツ)_/¯
Alphaville’s Jamie Powell has written about the zombie rally and Hertz shares defying gravity.