Day traders have poured a lot of money into Hertz, hoping to make easy money. But they are in for a rude awakening as the stock plunges to zero.
Hertz’s (NYSE:HTZ) shareholders might want to sell the stock before losing all their money. According to Morgan Stanley, shares of the bankrupt car rental company will likely go to zero, leaving shareholders with nothing.
After hitting a 52-week high of $20.85 on February 20, Hertz’s shares hit an all-time low of $0.40 on May 26.
The stock has been the source of speculative trading in the past few weeks. Shares have fluctuated considerably since Hertz filed for Chapter 11 on May 22.
Interest in the stock led Hertz to make a controversial secondary share offer. But the company pulled back the $500 million stock offering after being criticized by the Securities and Exchange Commission.
The failed equity raise motivated analyst Adam Jonas to slash his base scenario to $0 from $2 per share.
We are now more concerned that there is a potential risk of a NYSE de-listing, or potential liquidity shortfall where the company may exhaust available cash to run the business by the end of 2020, potentially leaving the equity with little or no residual claim.
Jonas also lowered his price target for a bull case scenario to $3 per share from $8, saying the company will need some sort of financial package to stay operational and get some money for shareholders.
In a bankruptcy process, common shareholders are the last to recover losses on their investments and are often left with nothing.
Unfortunately, the bull case is unlikely. An official de-listing from the NYSE, which Hertz is currently appealing, could drive the stock to zero.
Robinhood investors, who are mostly millennials, could lose their shirt. Indeed, millennials who lost their jobs have been betting on Hertz and other beat-up stocks, hoping to make money fast.
Investing app Robinhood saw record deposits in the first quarter of 2020, with daily transactions up 300% from the end of 2019.
Robinhood users are mostly inexperienced traders who aren’t conscious of the risks they’re taking. They are playing with the stock market instead of taking investing seriously. The vast majority of them will underperform the market or lose money.
Traders are making terrible decisions by investing in bankrupt stocks like Hertz. As opposed to serious investors like Warren Buffett, they aren’t cautious and show no fear.
Wealthfront’s investment chief Burton Malkiel said:
Legions of new day traders have poured new money into stocks without a care for the risks involved, clearly unaware of Buffett’s maxim that ‘It’s only when the tide goes out that you learn who’s been swimming naked.’
Robinhood day traders “frenzied buying” have helped to more than double Hertz’s share price after the car rental agency went bankrupt. They probably aren’t even aware that shareholders are almost always wiped out in the bankruptcy process.
The sad reality is that almost all individual traders suffer losses over time. There is no easy profit with day trading.
Everybody thinks they are a genius when everything is going up in the stock market. But no one should believe they are smarter than Warren Buffett. The stock market bubble will eventually pop.
Betting on bankrupt stocks like Hertz can only end badly. Robinhood investors are in for a rude awakening.