You can fool some of the people some of the time and that’s enough to make a decent living
- W.C. Fields
What’s going on with Hertz’s stock? This company once dominated the auto rental business but has recently fallen on hard times and was forced to declare bankruptcy. Such announcements usually drive the price of shares down to pennies. Initially it did in this case, too.
But that’s when the story took a turn to the bizarre. Hertz announced that it would sell lots of new shares and raise $500 million. To say this is unusual for a bankrupt company is an understatement. Moreover, the outlook was so bleak that in a corporate document, the company said at least five times that the shares are “worthless.” Corporate lawyer Tom Lauria acknowledged that equity holders would most likely be wiped out.
Ordinarily news like this would drive the stock price down. But speculators greeted this with enthusiastically and the shares rallied sharply. If an issuing company admits that its stock is worthless, why would anyone want to buy it at any price?
And then, when Hertz announced that it was withdrawing the sale of new shares, guess what happened? The stock popped again. If selling new shares is bullish, is not selling new shares also bullish? What could investors have been thinking – that not diluting already worthless shares is good news?
The Worst Chapter
Companies go bankrupt only as a last resort. After all, this move is never a credit to management, causes terrible losses for shareholders, and potentially opens up a Pandora’s Box of lawsuits. It is every company’s worst nightmare.
Interestingly enough, 2020 started off as a good year for Hertz. In fact, on Feb. 21, shares were trading at $20.29, the highest price in more than two years.
Then several problems surfaced. The company’s primary business, auto rental, was crushed by the virus. They couldn’t pay interest on their mountain of debt. And at the same time, the price of used cars plunged, significantly reducing the company’s net worth.
Between February 21 and March 18, the shares plunged by a jaw-dropping 83%. They went even lower in the following days, falling to just $0.56/share; at that point the decline from the high in February was more than 97%. Most investors understood this to mean game over - but day traders saw this as game on.
A Game Of Cents
Many day traders are particularly intrigued by shares in bankrupt companies because they are low priced and volatile, two criteria important to them. These traders couldn’t care less about a company’s long-term prospects. They hope their stock will jump a few cents a few minutes after they purchase it – and then they’re out.
If the stock goes higher they could make a modest profit and if they’re lucky a more than modest profit. And if they can repeat this a few times a day or at least a few times a week, suddenly being unemployed is not the calamity it seemed to be initially.
Many day traders deal with Robinhood Markets, a firm that enables them to place orders commission-free. In other words, even if their stock rises by just a penny or two, they’re ahead of the game.
Shares of Hertz looked like the perfect vehicle to trade. In March 2020, only 3,500 Robinhood traders owned Hertz. But after declaring bankruptcy on May 22, this number soared to 170,000.
On May 26, the first trading day after the announcement, the stock opened at $0.56/ share. But in the following two weeks it rocketed to $6, a nearly eleven-fold increase in a matter of days. Zero Hedge ran the following headline: Goldman’s Clients Are Getting Angry That Teenage Day Traders Are Crushing Them.
Day trading is always a precarious venture and trading shares that even the underlying company says are worthless adds greatly to the risk. While Hertz shares are down sharply from the high of two weeks ago, they remain far above the price they were when the company declared bankruptcy.
It’s a phenomenon of sorts that so soon after the market’s horrific selloff so many speculators would risk buying “worthless” shares. However, there’s no arguing with facts.
A New Superhero?
One of the new heroes of day trading is Dave Portnoy, the head of an online publication called Barstool Sports. More than 1.5 million people follow his every comment on Twitter.
Among his recent tweets: “I’m being modest when I say I’m the world’s greatest day trader,” ... “Stocks only go up, this is the easiest game I’ve been part of.” “I tell people there are two rules to (day trading): Stocks only go up, and if you have any problems, see rule No. 1.”
Not everyone agrees with these sentiments, and Warren Buffett, one of the wealthiest and most respected investors in the world, is among them. “I, for one, am in great fear of what this will do to the markets,” he said. “Personally, I am very afraid of what havoc people like (this) can wreak.”
Leon Cooperman, a hedge fund legend, also is concerned about the “What, me worry!” attitude of these day traders. In an interview on CNBC, he warned about the rash of speculation in the shares of bankrupt companies; he mentioned Hertz specifically and added, “This will end in tears.”
Amazingly, rather than reconsidering the risks they are taking, day traders who watched that interview were furious with Cooperman for pouring cold water on their dreams.
The rise of the retail speculator is not the financial story of the year, but it is an important barometer of the thinking out there. And right now, it appears to be flashing red.
Day traders dream of making dollars from their cents and seem oblivious to the possibility of their dollars turning into cents. Hopefully, years from now when they think back on their speculations in 2020, they will think “Hertz,” and not “it hurts.”
Sources: www.bloomberg.com; www.forbes.com; www.Investopedia.com; www.nbcnews.com; www.nytimes.com; www.techcrunch.com; www.zerohedge.com