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170,000 Robinhood Millennials Get Stuck in a Hertz Stock Spiral

Last Updated September 23, 2020 2:00 PM

By Joseph Young

The pandemic has led to a mad market through much of 2020 as bankrupt Hertz now plans to raise money by selling over $1 billion in what is essentially a junk stock. | Source: Shutterstock

170,000 retail traders are trapped in the Hertz stock after a 66% drop in seven days.
The company’s massive debt problem and gloomy warning to investors indicate a recovery is far out of sight.
Robinhood users FOMOed into the stock in early June.

On May 27, the stock price of Hertz dropped to as low as $0.555. It recorded a 97% drop in less than four months. Then, millennials suddenly started to rush into the stock.

Hertz has struggled since February due to the consequences of the pandemic.

Fewer people were traveling, causing the company’s rental car businesses which are primarily positioned at airports worldwide to crumble.

Retail investors on Robinhood thought Hertz would be an investment opportunity. The Federal Reserve has been pumping liquidity into the market and fear of missing out (FOMO) in the stock market was well alive.

Now, with 170,000 investors trapped in the stock, the bull market is at risk of coming to an abrupt halt.

hertz stock — Retail traders trapped in Hertz stock on Robinhood | Source: Robintrack

Why Are So Many Investors Stuck in Hertz?

According to Bloomberg’s Lisa Abramowicz, Hertz itself warned investors that they may lose all their money if they buy the company’s stock.

The debt problem of Hertz is so severe that the company said recovery from the bankruptcy plan is unlikely until bondholders are fully compensated.

Hertz’s own warning came after retail traders loaded up stock in the first half of June.

As of June 15, data from Robintrack shows more than 170,000 users hold Hertz stock. Most of the investors entered the stock when its value surged to $5.53 on June 9. Since then, the Hertz stock fell by 66% within less than a week, now hovering at $1.88.

Investors considered Hertz a compelling buy after its plunge from a $2.88 billion market cap in February to $267 million in mid-June.

But, just because the stock is down 90% from February, it does not guarantee that it would recover back to similar levels in the short-term.

The Stock Is Still On Rocky Footing

As CCN.com previously reported, London’s second-largest airport Gatwick predicts the number of airplane passengers to not return to 2019 levels in the next three to four years.

One of the core client bases of Hertz is travelers that request rental cars at airports. If airlines and airports see declining activity, the rental car business will also struggle in tandem with the travel sector.

The issue of declining clientele further intensified the drop in net income which Hertz saw by as early as late 2018.

In the fourth quarter of 2018, Hertz Global recorded a net loss of $101 million. In comparison, Hertz Global secured a net income of $616 million in the fourth quarter of 2017.

The full-year 2018 financial results read:

For the fourth quarter 2018, total revenues were $2.3 billion, a 10% increase versus the fourth quarter 2017. Net loss attributable to Hertz Global was $101 million, or $1.20 loss per diluted share.

In the fourth quarter of 2019, Hertz Global recorded a net loss of over $100 million once again.

In the upcoming months, the main challenge of the company is to deal with the bankruptcy plan and structuring corporate debt with immediate recovery far out of sight.