U.S. markets open in 8 hours 10 minutes
  • S&P Futures

    3,268.25
    -34.00 (-1.03%)
     
  • Dow Futures

    26,306.00
    -251.00 (-0.95%)
     
  • Nasdaq Futures

    11,188.00
    -154.75 (-1.36%)
     
  • Russell 2000 Futures

    1,544.50
    -13.90 (-0.89%)
     
  • Crude Oil

    36.18
    +0.01 (+0.03%)
     
  • Gold

    1,874.20
    +6.20 (+0.33%)
     
  • Silver

    23.53
    +0.17 (+0.75%)
     
  • EUR/USD

    1.1682
    +0.0004 (+0.04%)
     
  • 10-Yr Bond

    0.8350
    0.0000 (0.00%)
     
  • Vix

    37.59
    -2.69 (-6.68%)
     
  • GBP/USD

    1.2908
    -0.0015 (-0.12%)
     
  • USD/JPY

    104.2980
    -0.3120 (-0.30%)
     
  • BTC-USD

    13,470.30
    -16.93 (-0.13%)
     
  • CMC Crypto 200

    263.76
    +21.08 (+8.69%)
     
  • FTSE 100

    5,581.75
    -1.05 (-0.02%)
     
  • Nikkei 225

    23,135.08
    -196.86 (-0.84%)
     

Do Not Buy The Dip In Hertz Stock

Wayne Duggan
·5 mins read

When it comes to Hertz (NYSE:HTZ), it’s difficult to know where to start. But bankruptcy is a pretty good place to start when it comes to assessing Hertz stock.

Hertz stock sign in Montevrain, France on May 8, 2016.
Hertz stock sign in Montevrain, France on May 8, 2016.

Source: aureliefrance / Shutterstock.com

It may seem like a no-brainer that a bankrupt company is a terrible investment. But feedback I got from readers when Hertz rallied 521% in a week in early June highlighted just how little some investors seem to understand about what bankruptcy means and how it typically plays out for investors.

In a nutshell, it’s likely Hertz stock is worth zero.

InvestorPlace - Stock Market News, Stock Advice & Trading Tips

Hertz Stock Bankruptcy

One thing I’ve heard from Hertz stock bulls is that companies often survive bankruptcy and thrive. Companies like Hertz with valuable global brands are typically the ones that have the best chance of navigating bankruptcy.

There are three outcomes for investors when a company like Hertz declares bankruptcy. First, the company liquidates its assets and disappears. That’s the path taken by Circuit City, for example.

Second, the company uses the bankruptcy process to restructure financially. Most investors know several major airlines have gone through bankruptcies in the past. Now those companies have stocks trading at multi-billion-dollar valuations. But investors need to know that the stock tickers they see trading on the market today almost always have nothing to do with the original shares of pre-bankruptcy stock.

The first stock I ever bought was General Motors (NYSE:GM) back in 2008. I bought it on the hope GM would bounce back as soon as the financial crisis was over. Unfortunately, GM filed for bankruptcy in 2009.

Today, GM has a $41 billion market cap. However, the old GM shares were delisted, renamed Motor Liquidation Company, and the ticker was changed to MTLQQ. In March 2011, MTLQQ stock was canceled and shareholders received no distribution or payment at all. New GM shares have nothing to do with the old GM shares, which don’t even exist anymore and became completely worthless. I learned a costly lesson at the time that just because a company survives a crisis doesn’t mean its stock won’t go to zero.

This delisting and relisting route is fairly common for large companies with extremely high debt loads. Hertz has a $235 million market cap and $19 billion in debt.

Analyst Take

The third possible route is that the company will settle all its debt claims and emerge from bankruptcy with remaining equity value. That’s the hope for PG&E Corporation (NYSE:PCG) investors. But the difference between PG&E and Hertz is that PG&E was hit by a massive one-time liability related to California wildfires. Before that, PG&E’s business was stable and profitable. Hertz’ business and share price have been sinking like a stone for a decade. Net income is down 639% in the past 10 years, and net debt is up 89%.

“We believe it is more likely than not that equity will not carry a meaningful residual value,” Morgan Stanley analyst Adam Jonas says. Jonas has a zero base case price target for Hertz stock.

Former hedge fund manager Whitney Tilson included Hertz stock in a list of “bankruptcy bubble” stocks back in June.

“Every one of these stocks isn’t just likely to decline … they’re all zeros,” Tilson says.

Why Did Hertz Rally In June?

So, if Hertz stock really is a “zero,” why did it rally so hard in June? There are at least three reasons for the stock’s rally. First, short sellers that bet against the stock at much higher prices took the bankruptcy filing as an opportunity to cash out of their positions. To do so, they covered their shorts by buying back shares of stock. That buying volume helped drive the stock higher, a phenomenon often referred to as a “dead cat bounce.”

Second, that dead cat bounce created a short-term trading opportunity.

“This insanity is being driven by individual investors day trading and speculating like crazy,” Tilson says. Day traders rushed into and out of Hertz stock in a matter of days, adding to the short-term spike in share price.

Finally, Hertz stock started showing up on Robinhood’s most-owned list, and it’s clear that a lot of investors didn’t fully understand what was going on. They bought shares with only a surface-level understanding of the bankruptcy process and Hertz’s financial situation.

I fully believe this lack of understanding is the primary reason the stock is currently at $1.54 and not 1.54 cents. These investors will learn the hard way that another 500% rally is unlikely to happen any time soon.

Sure, Hertz may follow in GM’s footsteps and survive the bankruptcy. But Hertz stock is almost certainly eventually headed to zero.

Wayne Duggan has been a U.S. News & World Report Investing contributor since 2016 and is a staff writer at Benzinga, where he has written more than 7,000 articles. Mr. Duggan is the author of the book Beating Wall Street With Common Sense, which focuses on investing psychology and practical strategies to outperform the stock market. As of this writing, Wayne Duggan was long GM.

More From InvestorPlace

The post Do Not Buy The Dip In Hertz Stock appeared first on InvestorPlace.