Management turmoil, risky leverage, and signing acquisitions that could only be sustained with record revenue is a scary picture right? Hertz Global Holdings (NYSE: HTZ) were living through this nightmare for the past few years. However, the car company plummeted when the COVID-19 storm emerged. Creditors were frustrated with the risky leverage, disappointed with insignificant revenue in 2020, and were unsure whether the current management could navigate the current minefield. Consequently, Hertz filed for bankruptcy.
So why is Hertz up?
Some investors are puzzled as to why the bulls are propPing up HTZ. The bulls of today are radically different from the bulls of yesterday. It seems day traders looking to make a quick buck, which there are many of in today’s society, invested in HTZ under the notion it can only go up. Hence a significant amount of money is flooding into HTZ.
However, there might be some value investing behind the curtain. Hertz, after the restructuring, is striving to come back leaner and stronger. With the airline industry coming back (a place where rental cars are in high demand) HTZ could see a positive outlook for revenue. Thus, if the comeback is achievable the price now would be a nice discount (opinion not advice).
Is Hertz worth the investment, or should you short?
Short answer: Both investment strategies hold the same risk as your local casino.
Before I start, I am obliged to remind our viewers that this is not advice only general commentary from my extensive research in this area.
Buy low sell high
The first strategy is to buy low sell high. Endless retail investors are gravitating towards hertz because of the meager share price. A low share price combined with the common belief that ‘it must go up right’ is luring investors down the buy low sell high path. Now granted hertz is trading at a significant discount satisfying the buy low requirement.
However, selling at a high price (enough to make a capital gain) is uncertain. Because to sell it at a higher price you need a) bullish investors to drive up the stock and b) buyers to buy HTZ off you at that higher price. Honestly, what is the incentive to buy? It seems the only reason why bulls would rally behind hertz is in the hope of it rising. Bankruptcy screams an unsuccessful business and often leads the existing shareholders burnt.
The restructuring of hertz should see debtors gain a significant equity stake in rental company . When debtors snap up the equity guess who takes the heavy hits the stockholders. Because the new owners sell your shares for almost pennies on the dollar. We saw it happen with General Motors in 2009 and Boston Markets in 1999. Thus, yes you can buy low but the chances of you selling high are like getting 21 in blackjack.
Now onto shorting Hertz. Considering the above criticisms of the buy low sell high strategy, shorting might seem perfect. Hertz should come down immediately after the bankruptcy plans are set in stone. However, its anyone guess as to when Hertz will announce the restructuring. Thus timing is imperative. Because if your timing is off, your (put) options contract could expire. Not to mention the yearly brokerage fees for shorting hertz is 94%. Consequently, investors who look to short should be in and out quickly. Overall, shorter sellers may predict the right on the direction, but incorrect timing and brokerage fees could burn you as well.
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The information above is not financial advice. Youth Investment Group has no liability for personal financial interests or investment decisions. You should make your own investment decisions based upon your own research and what you believe is best for you.
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Written by Patrick McLoughlin, Senior Manager of YIG.