In what might be the most flagrant display of white-collar hijinks in quite some time, Hertz has been given permission to issue up to 250 million new shares.
In a move that could net Hertz (NYSE:HTZ) as much as $1 billion, the judge who is overseeing it’s bankruptcy proceedings approved the request to issue more shares as the failing car rental company looks to cash in on the stock’s unexpected spike. While it is common for companies to issue new shares to take advantage of a high stock price – Tesla (NASDAQ:TSLA) did it as recently as February – this situation is very different. As Hertz management pushes hundreds of millions of shares onto the public market, it is proceeding to sell the shares they own at an alarming rate. In the past three months, insiders at the company have bought around 12,000 shares of their own stock, while selling over 55 million.
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It’s an unapologetic smash-and-grab. With the judge’s decision on Friday afternoon, Hertz management has essentially been given permission to sell tickets for a sinking ship. The company has stated that the situation “present[s] a unique opportunity for the Debtors to raise capital on terms that are far superior to any debtor-in-possession financing”. In layman’s terms, what they’re saying is we can get our hands on money we don’t need to pay back.
While Chapter 11 bankruptcy does not always mean the end of a company, more often than not there is a high risk of the stock going to zero, completely wiping out existing shareholders’ value. While a business may continue to operate, its shareholders are at the back of the line for any repayments and there is no guarantee if the company issues new shares, existing shareholders will receive them.
What Hertz management is relying on is The Greater Fool Theory. It states that “the price of an object is determined not by its intrinsic value, but rather by the local and relative demand of a specific consumer.” Essentially something is worth what people are willing to pay for it. Hertz stock may soon circle the drain, yet if someone is willing to pay $4 a share, then that’s the price. By trying to exploit inexperienced, buy-the-dip investors, the company is looking for cheap financing to pay its debts, and I truly hope its plan falls flat on its face. However, for that to happen, people have to stop buying the stock, which is proving to be harder than it looks.
The emergence of the retail trader has given rise to the popularity of some incredibly speculative stocks. In the past week, almost 76,000 Robinhood users bought Hertz stock. This was only surpassed by Nikola (NASDAQ:NKLA), the recently public $23 billion electric vehicle manufacturer that sold exactly 0 vehicles last year and has a market cap only slightly lower than Ford (NYSE:F). The others to make the top five are Top Ships (NASDAQ:TOPS), a micro-cap, eco-friendly oil tanker company, Genius Brands (NASDAQ:GNUS), an animation company that saw its stock soar almost 2,500% through the course of May, and Oasis Petroleum (NASDAQ:OAS), an oil company which has seen its stock fall 92% since late 2018.
While it isn’t a complete crap-shoot, Apple (NASDAQ:AAPL), Tesla, and Amazon (NASDAQ:AMZN) all feature in the top 11, for this motley crew of businesses to make up the 5 most popular stocks on Robinhood last week is eye-opening for the current state of the market. Investors are looking for the easy payday. A quick bounce where they can double their money, sell out to someone with similar ambitions, and move on to the next pump-and-dump. The fact that so many have been successful with this strategy makes me think we’re in for a rude awakening.
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If your portfolio is filled with solid, long-term businesses that possess strong fundamentals and enviable balance sheets — I’m talking Microsoft (NASDAQ:MSFT), Walmart (NYSE:WMT), Facebook (NASDAQ:FB), etc — then this warning is not for you. However, if you’ve been buying the dip on penny stocks, hoping to make a quick buck, be very careful that you’re not the one who ends up holding the bag once everyone else has made a killing. No one wants to be the greater fool.
MyWallSt operates a full disclosure policy. MyWallSt staff currently hold long positions in companies mentioned above. Read our full disclosure policy here.