Can Hertz (HTZG.Q) shareholders catch a break? Recently, it seems like the answer is no. But the company has a number of catalysts and with the stock's recent decline, I think it now has a very good chance to double over the next three years -- offering investors today annualized returns of 26%. Yes, it's really that good. So my Special Situations portfolio is adding to its stake in the beleaguered rental company.
Hertz has been hit by a variety of issues as of late. It's in the process of restating its financials. It withdrew its 2014 guidance. It fired its CEO and is looking for a new one. The spin-off of its equipment-rental business will probably be delayed beyond Q1 2015. But each of these is a fixable and short-term issue, and still the stock is down a huge 30% recently.
Despite these issues, the stock has a number of positives that should prove favorable for investors at today's prices. First, the company is spinning off its equipment-rental business. The spin-off actually allows the stand-alone parent to generate more cash.
Second, the parent will put $2.5 billion in debt with the equipment-rental unit. Then that cash raised will effectively be used for deleveraging and stock buybacks at the parent.
And the buybacks should be substantial. The company -- at a much higher stock price -- suggested it could buy back as much as 20% of its shares. I think that could be higher still, with the rather precipitous fall in the stock up until now.
Finally, I think activist investors will provide an important catalyst. I expect the arrival of Carl Icahn and his troika of representatives on the board to help drive positive change at Hertz (pun apologetically intended). Icahn owns nearly 9% of the stock. JANA Partners raised its stake in the company to 7%, up from 1.3% as of June 30.
Each of these catalysts should help propel the stock higher over the next few years.
Foolish bottom line
So later this week, my Special Situations portfolio is buying $1,000 more of Hertz stock. Interested in Hertz or have another stock to share? Check out my discussion board or follow me on Twitter @TMFRoyal.
