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Hertz’s $500 Million Stock Offering Proves Gamblers Have Taken Over Stocks

Last Updated September 23, 2020 2:00 PM
Mark Emem
Last Updated September 23, 2020 2:00 PM
  • Hertz intends to sell common stock worth up to $500 million.
  • The stock has recovered from a late May low.
  • The car rental company has warned its stock could drop to zero.

That was quick.

After a bankruptcy court approved a request by Hertz (NYSE:HTZ) to sell new stock worth up to $1 billion late last week, the car rental firm has gone ahead to publish a prospectus.

Early Monday, Hertz filed with the SEC a prospectus supplement. The document indicates Hertz will sell up to $500 million in common stock .

As stock climbs, Hertz’s Corporate fortunes are in a downward spiral

With Hertz being in the reorganization process after filing for Chapter 11 bankruptcy, you would think the stock would have no takers. But after filing for bankruptcy on May 26, HTZ is up over 390% from last month’s low .

On the millennial trading app Robinhood, Hertz has been the second-most popular stock over the last month .

Over the 30 days, the number of app users holding the stock has increased by over 75,000.

HTZ has been the second-most popular stock on Robinhood over the last one month. | Source: Robintrack 

So what kind of investors are buying the stock? Certainly not the type that has been getting their investing lessons from Warren Buffett.

On the contrary, the buying spree is being driven by day traders, speculators, and gamblers.

A vote of no-confidence from the NYSE

As is often the case when a public company files for bankruptcy, the New York Stock Exchange has indicated it will delist Hertz’s stock for failing to meet the listing requirements .

Shareholders won’t lose their existing shares after delisting. Trading will, however, be restricted to the over-the-counter market–a more relaxed trading environment with reduced liquidity. Delisted stock is also hard to sell, and this is likely to increase the selling pressure going forward.

Since Hertz disclosed that the NYSE had given a delisting notice , the stock has fallen over 30%.

Since hitting a low of nearly 40 cents last month, HTZ has climbed above $2 per share. | Source: TradingView 

The delisting can only portend doom for the stock, further evidence that no rational long-term investor would touch it with a ten-foot pole.

Hertz is skeptical about its future

Restructuring processes usually have unpredictable outcomes. Hertz has warned that the stock could continue falling and even drop to zero.

In the prospectus announcing the intention to sell common stock worth up to $500 million, Hertz noted that the Chapter 11 bankruptcy reorganization process could destroy shareholder value.

It said:

[The reorganization process has] caused and may continue to cause our common stock to decrease in value, or may render our common stock worthless.

You don’t need more evidence than this that the stock has become a favorite for speculators and gamblers.

Smart money has already disembarked from Hertz

Activist billionaire investor Carl Icahn owned about 39% of Hertz. As the car rental firm entered bankruptcy, Icahn disposed of his entire stake at an average of 72 cents .

The activist billionaire investor lost nearly $2 billion on his bet.

common stock
Carl Icahn, who held a 39% shareholding in Hertz, dumped his stake last month. | Source: Twitter 

Amid all this, retail investors have been picking up the stock and driving up the price. The stock is currently trading above $2 after hitting 41 cents late last month.

Wall Street vs. Main Street

The Hertz stock has climbed despite analyst after analyst expecting it to go to zero. Analysts have called the phenomenon “not investing” but “gambling.” 

CreditSights analysts have dubbed the new stock issuance “robbing from the misinformed to give to the senior secured.”

In a bankruptcy, the senior secured debt is better equipped to avoid losses as assets back the liability.

With the issuance of new stock, Hertz is saying the quiet part out loud–it does not expect long-term investors to buy shares; instead, it is short-termers and speculators. The stock’s price surge after filing for bankruptcy is further evidence of this.

Disclaimer: This article represents the author’s opinion and should not be considered investment or trading advice from CCN.com. The author holds no investment position in the above-mentioned securities.