Stock Market Wrap-Up: Why Luckin Coffee Jumped 50% While Hertz Stock Crashed

The stock market moved higher on Tuesday, reflecting rising optimism among investors about the prospects for a return to more normal business conditions in the coming weeks and months. Public health officials fear that relaxed mitigation efforts could bring back a resurgence of COVID-19 outbreaks, but progress on several fronts toward a possible vaccine also made market participants more comfortable. The Dow Jones Industrial Average (^DJI 0.67%) led the way with a greater than 2% gain, with smaller rises for the S&P 500 index (^GSPC 0.87%) and Nasdaq Composite (^IXIC 1.11%).

Today's stock market

Data source: Yahoo! Finance.

Volatility continued to swirl among individual stocks. Luckin Coffee (LKNC.Y 3.52%) has seen its shares punished in the wake of its recent fraudulent financial reporting scandal, but the Chinese coffee stock jumped more than 50% Tuesday. Meanwhile, Hertz Global Holdings (HTZG.Q) wasn't as lucky, as its stock plunged 80% as the consequences of coronavirus-inspired shutdowns finally caught up with the rental car giant.

Image source: Getty Images.

Shareholders are pressing their Luck(in)

Luckin Coffee stock jumped 53% on Tuesday, but that only managed to claw back a small portion of the ground the Chinese coffee company's shares had lost since trading reopened last week. The stock had fallen nearly 70% from where it had been suspended for much of April and May, and even after today's big gains, the share price is still less than half what it fetched immediately before the trading halt.

The likely reason for the jump is one that we've seen with some other stocks lately: the potential for a short squeeze. About 38 million of the company's 253 million outstanding shares were sold short as of April 30, according to figures from Yahoo! Finance, and many investors are convinced that the coffee chain is worthless as a going business concern. With fraud investigations ongoing, short-sellers believe that Luckin will have to rein in its store expansion efforts and close locations, destroying what's left of investor confidence and giving them some extra profit.

Even when companies are in major trouble, short squeezes can send their shares sharply higher. Moreover, there's at least the possibility that Luckin can survive as an ongoing business and bounce back from the allegations against it. The odds are good that U.S. investors won't be along for the ride, though, as the Nasdaq is still looking to delist the stock after going through the required hearing process.

Dead end for Hertz

Elsewhere, Hertz Global Holdings saw its stock drop more than 80%. The rental car company filed for bankruptcy protection under Chapter 11 of the U.S. Bankruptcy Code over the weekend, ending a long battle to maintain liquidity in the face of coronavirus-caused disruptions to its business.

The pandemic's impact on travel stocks in the airline and cruise ship industries was well documented, but many investors failed to notice the pressure on rental car providers. With travel having evaporated, demand for rental vehicles went away with it.

Yet what ended up forcing Hertz into bankruptcy was its financing arrangement for its vehicle fleet. When vehicle prices dropped due to the pandemic, Hertz had to come up with considerable amounts of cash to satisfy creditors' collateral needs. It couldn't do so, and creditors weren't willing to provide extra cash the way that those for cruise companies and airlines have.

Bad news for Hertz was good news for Avis Budget Group (CAR 0.43%), whose shares were higher by 11%. Even with today's gain, though, Avis Budget faces many of the same challenges -- and this surviving rental car company's stock still remains far below where it started the year.