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Hertz stock up 888% 10 Days – Should You Buy In?


On June 2nd 2020 we told you about the Hertz Bankruptcy and the potential Winners and Losers.

If you want to read my full thoughts on the company, what caused its bankruptcy, and the ripple effects to various industries use the link above.

At the end of the article, I also told you to stay away from stocks in this industry… Here’s the full text of what I said to end the article…

Bolded wording is my emphasis today.

How Should You Play This?

If you own stock in any major companies in this arena and you’re not planning to hold for the long term, you should sell.

This goes for car rental companies, large automakers who have a lot of debt, and auto part supply companies.

Stay away from everything in this arena for the time being… I don’t think it will crash and see mass bankruptcies with companies closing for good.

But there’s far too much uncertainty and risk for me to get involved in any of these companies right now

***

Since the original Hertz article published here on June 2nd its stock rose from $0.85 per share to $5.53 per share as of the close of the market on June 8th, 2020.

Or a 551% rise in only 4 days trading days.

And from its low of 56 cents per share as of the market close on May 8th its shares are now up to $5.53.  Or an increase of 888% since in the 10 trading days from May 26th 2020[JR1]  to June 8th. [i]

Why is its stock up so much in such a short period of time? Was I wrong in my first analysis?  And should you join in and buy Hertz?

Let’s figure this out…

Why Did Its Stock Rise 888% In 10 Trading Days?

Hertz shares rose for 3 major reasons…

  1. The US Economic report released on June 5th showing a surprising rise in employment
  2. A report June 7th showing people are beginning to travel more again.
  3. Speculation.

So, let’s go over these one by one starting with the rise in employment.

First up, on June 5th, 2020 The Bureau of Labor Statistics (BLS) announced the “official” unemployment rate in the US fell in May from 14.7% to 13.3% after the economy gained 2.5 million jobs in the month.

This is the largest monthly gain in jobs since the BLS began recording data in 1939.

This shocked everyone – me included.

Almost everyone on Earth expected the unemployment rate to continue rising toward and above 20%. [i]

Why would this surprising good news cause Hertz shares to rise?

Because if more people are working it means they have more cash and they can travel more.

This is important because we’re now hitting the travel season here in the US.

And as I talked about in the original article, Hertz’s results link to the amount of people travelling and using rental cars.

The more people that have jobs – the more people have money to travel. The better things are for Hertz… At least that’s the thinking.

This is one reason Hertz shares rose so much in the last few days.

Another is that this travel trend with more people working isn’t just theory… Its translating into reality.

On June 7th, the Transportation Safety Administration (TSA) reported weekly travelers going through TSA security checkpoints in the US were up 25% from 352,947 to 441,255 over the previous week. [i]

This improvement is another reasons Hertz shares are up so much in a short period.

And the last reason is speculation.

People see a company like Hertz file for bankruptcy protection to rework its debt and operating structure and assume the company is worth more than 56 cents per share.

At that low point the market valued the entire company as only worth $72 million.

According to its most recent balance sheet numbers Hertz owns $17.65 billion worth of vehicles and leases.

Even if you halve this to account for the company selling vehicles at a discount to raise cash that’s still $8.8 billion worth of vehicles.

So yes, the entire company is worth more than $72 million… Or is it?

Was I Wrong About Hertz?

In short, no.

This site focuses on long term investing concepts unless otherwise noted.

Why?

If you invest for the long term, you’re almost guaranteed to become wealthy over time.

Because on average the markets gone up 10% per year for 100 years[JR1] . [i]

If you invest long enough with enough capital, you’re guaranteed to become wealthy.

And remember what I said at the end of the last article…

Stay away from everything in this arena for the time being… I don’t think it will crash and see mass bankruptcies with companies closing for good.

But there’s far too much uncertainty and risk for me to get involved in any of these companies right now

Nothing about that’s changed.

But what about the stock going up?  Doesn’t this prove I was wrong?

Again, no.

I base my performance over long periods of time when investing – years, not days or months.

The people buying Hertz now are likely to get hammered soon.

Why?

Because in most bankruptcies current shareholders get wiped out… Meaning they lose all their money.

In a bankruptcy situation companies look to first renegotiate their debt with creditors.

If they can do this with the creditor/lender three things typically happen…

  1. The bankrupt company can take out more debt but pay it out over a longer period.
  2. The bankrupt company can take out more debt at higher interest rates and by putting more collateral down in exchange for longer payment periods.
  3. The bankrupt company gives debtholders shares in the “new” company in exchange for more lenient financing terms.

If companies can’t negotiate their debt terms they generally go out of business.

This doesn’t look likely for Hertz.

This is why bankruptcy is often also called restructuring.

The company works to restructure its debt and operations so that its more profitable after it “reemerges” from bankruptcy.

Companies usually have the same name, logos, and similar operations.  But the structure of the company its new because there are new levels of debt and equity.

When this happens, the value of the old shares goes to zero. The new shares get issued.  And the new shareholders and debt holders now own the company’s shares and debt.  The old structure disappears or gets merged into the new one.

In any bankruptcy filing the payouts go like this…

Debt holders get paid first usually through assets sales or restructurings.

Preferred shareholders – if there are any – get paid next with whatever’s left.

And common shareholders get paid last if there’s any money left over… Usually there isn’t.

In Hertz case they aren’t likely to get paid anything either because of its massive debt load.

Why?

Because Hertz has $19 billion in debt compared to about $1 billion in cash.

To further illustrate this point…

After discounting the value of its fleet – talked about more in the original article on the company – and subtracting all remaining assets from liabilities, Hertz equity has a negative value into the billions of dollars… Meaning its worth less than zero.

So yes, while the entire company is worth more than $72 million… Its shares are worth far less due to its massive debt.

Because of its huge debt, there’s an almost 0% chance that “old” shareholders of Hertz stock – those who own now – will get paid anything after the company comes out of bankruptcy.

The people buying Hertz shares now are about to get hammered for their speculation.

And if this still doesn’t convince you, follow the “smart” money.

Since the company filed for bankruptcy, company insiders and executives sold a combined 22,303 shares as of this writing[JR1] . [i]

And billionaire activist investor Carl Icahn sold his entire 39% stake in Hertz shares at 72 cents per share… Or for a total loss of just under $1.9 billion.

These people know Hertz is unlikely to pay anything to current shareholders after it emerges from bankruptcy or they wouldn’t sell.[JR2]  [ii]

The market does crazy stuff in the short term… And this includes individual stocks.

But these crazy moves in performance in the short term don’t make you right or wrong.  Your analysis does.  And so, does performance over the long term.

And the analysis of Hertz now and going forward says to stay away…  Even though its shares rose 888% in 10 trading days.

Because its longer-term prospects for current shareholders are bleak.

sources

[i] https://www.marketwatch.com/story/hertzs-stock-rockets-to-erase-all-post-bankruptcy-losses-2020-06-08

[ii] https://www.cnn.com/2020/06/05/economy/may-jobs-report-2020-coronavirus/index.html

[iii] https://www.benzinga.com/news/20/06/16208439/hertz-stock-jump-115-erases-post-bankruptcy-losses-as-travel-revives

[iv] https://www.wealthsimple.com/en-us/learn/average-stock-market-return#:~:text=Average%20stock%20market%20return%20over%20time&text=Through%20May%2025%2C%202018%2C%20the,annual%20return%20has%20been%205.42%25.&text=Average%20annual%20returns%20for%20the,of%202018%20was%20about%2010%25

[v] https://www.benzinga.com/news/20/06/16208439/hertz-stock-jump-115-erases-post-bankruptcy-losses-as-travel-revives [1] https://nypost.com/2020/05/28/carl-icahn-dumps-hertz-stake-for-nearly-2b-loss/

[vi] https://nypost.com/2020/05/28/carl-icahn-dumps-hertz-stake-for-nearly-2b-loss/


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