To the layman, the stock market is often viewed as a casino. While I generally disagree with this premise, the market is made up a diverse set of investors, a subset of whom may hold and act on these views.
Unfortunately, these tendencies have become more pronounced in recent times. With the increasing democratisation of investing through zero commission brokerages like Robinhood and people being bored out of their minds thanks to the pandemic, the stock market seems to have become an outlet to satisfy these people’s gambling urges. Certain stocks that fundamentally have no business recovering like the US airline stocks have defied gravity in the past few weeks.
One extreme example of this is the illogical price action of Hertz (NYSE: HTZ), the global car rental company that is undergoing Chapter 11 bankruptcy in the US.
In today’s article, I’ll run through some background on Hertz, the recent price action of the company, the [email protected]$h!+ management has tried to pull on investors and why it makes no fundamental sense to roll the dice on this company.
Background of Hertz
Consumers should be no stranger to Hertz, one of 2 big car rental companies in the world. My experience with the company has been more from a theoretical viewpoint, as a marketing case study in my university days about its legendary duel with competitor Avis Budget. Avis’ ‘We Try Harder’ marketing campaign in the 20th Century was a great example of entertaining underdog advertising.
Their business model is simple, buy / lease a large fleet of cars and rent them to predominantly travelers at airports on short term leases. This is similar to how taxi companies operate, albeit on an even shorter lease terms.
Rise of ride sharing
In recent years, this business model has been challenged by ride sharing apps like Uber and Lyft, just like how taxi companies have been challenged. Plateauing revenues with high fixed overheads and interest cost have led to continuing losses in recent years.
| Income Statement | 2015 | 2016 | 2017 | 2018 | 2019 |
| Revenue | 9,017 | 8,803 | 8,803 | 9,504 | 9,779 |
| Gross Profit | 1,603 | 1,375 | 1,047 | 1,459 | 1,728 |
| Interest Expense | (599) | (569) | (624) | (717) | (762) |
| Net Profit | 273 | (491) | 327 | (225) | (58) |
| Balance Sheet | |||||
| Current Assets | 6,979 | 3,020 | 3,539 | 3,878 | 3,864 |
| Total Assets | 23,514 | 19,155 | 20,058 | 21,382 | 24,627 |
| Current Liabilities | 4,900 | 2,342 | 2,955 | 3,351 | 4,408 |
| Total Liabilities | 21,495 | 18,080 | 18,538 | 20,262 | 22,739 |
| Total Equity | 2,019 | 1,075 | 1,520 | 1,120 | 1,888 |
The company’s balance sheet has been deteriorating too over the years as it fell into a net current liability position in 2019.
Covid-19 and Bankruptcy
Covid-19 was the final nail in the coffin for many businesses that relied heavily on debt to survive. With almost zero revenues as a result of widespread Government enforced lock downs coupled with debt and fixed operating costs to pay, Hertz filed for Chapter 11 bankruptcy on May 22.
This prompted the stock to crash to a low of 55c, prompting billionaire investor Carl Icahn to cut loss on a position once worth almost $2 billion.
The gamble
In spite of the news, Hertz shares somehow staged a comeback as huge volumes of stock was bought, by presumably retail investors, to pump the stock back up to above $6 per share.
I recently came across this great website called Robintrack that tracks the popularity of a certain stocks on Robinhood, a zero commission brokerage app for US users only at the moment. The website essentially taps into the Robinhood API to download the price and popularity of every stock on the Robinhood platform. My understanding is that popularity is based on whether a user owns at least 1 share of a particular stock.
It is particularly useful if you wish to track retail investor sentiment in the US. Apparently it is shared to Kaggle as well, maybe a future side project to look into.
Anyway, I’ve downloaded the user chart for Hertz from Robintrack and you can see the surge in the number of users owning the stock in the wake of the surge in HTZ share price. This puts Hertz as the 50th most popular stock on the platform from nowhere.
For added context, here is the top 18 most popular stocks on Robinhood at the moment. You see a stunning number of stocks that were wiped out by Covid-19 (the airlines and cruise lines for eg) being held by many Robinhood investors.
This is why many professional fund managers have come out to warn retail investors that this will end badly.
Shady management moves
To make matters worst, management made a very scummy move and decided to raise funds via a secondary offering to investors to take advantage of the share price surge. It was astonishingly approved by a judge as well.
Why this is so bad and clearly a scam is that by declaring bankruptcy, it is signalling to the market that it is worth nothing. Yet by offering equity to investors, it is telling people that it is actually worth something.
Thankfully, the SEC did its job to query HTZ on its offering, prompting them to cancel the whole plan altogether. If the share offering had gone through, I think HTZ management, the underwriters Jefferies and the SEC should all go to jail for fraud / negligence.
Why it makes no sense to bet on the company
While the company was unable to con investors out of more money, I do not understand why investors are still willing to give it a chance. Maybe its a lack of understanding of how bankruptcy works.
In a liquidation due to bankruptcy, equity holders’ claims on the company is ranked the last, with secured and unsecured creditors having first dibs on whatever assets the company still has. With the debt burden on the company far outstripping the market value of the assets (who would pay a good price for used cars anyway), equity shareholders will be left with nothing at the end of the process.
Why this company is not trading at $0 is inconceivable to me.
Gambling is not investing
The only reason to buy HTZ now is that you believe in the Greater Fool theory, whereby you thinking that there will be a Greater Fool that comes along to allow you to profitably exit your gamble.
This is not an investing process that I believe in. In the long run, I do not believe that this strategy will be able to generate sustainable returns. If you’re invested in HTZ, just something for you to think about.
Other US companies I’ve written about:
Zoetis
Tesla
Happy Hunting,
KK
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