Hertz Global Holdings (OTC:HTZG.Q), which filed for Chapter 11 bankruptcy protection on May 22 under the pressure of mounting debt payments and a near standstill in revenue generation, soared 84% higher during Thursday's trading session. Its stock price has now more than quadrupled from its opening price Wednesday, and many investors are contemplating pouring money into the volatile stock -- which would likely be a massive mistake.
Let's look at what's happening and why Hertz's common stock is not something you want to own.
Why did Hertz stock pop?
Why is owning this stock a bad idea if it has quadrupled since Wednesday? One reason is that traders are speculating on the high volatility of the stock before it almost certainly goes to zero. And investors enthusiastic about the current bullish transportation and airline news may not understand Hertz's bankruptcy situation fully. American Airlines Group has said it plans to boost flights by 74% next month, suggesting that the worst is over, and that notion perhaps signaled to investors it was time to buy oversold transportation stocks. The health of airlines is an important factor for Hertz, as it generates the vast majority of its revenue from people traveling to and from airports.
How shareholders get wiped out
Filing for bankruptcy can take many routes, and as Hertz has been labeled an essential company it will continue operations until it works out a deal with its credit lenders. For Hertz, the issue is that the company has a $19 billion pile of debt, and the vast majority of that debt -- about $15 billion -- is in secured assets tied to the financing of its large vehicle fleet.
This matters, because when a company goes bankrupt and is forced to negotiate and satisfy its lenders, the first to be served are secured debt holders. Those big dogs will certainly take almost everything of value, one way or another, and what's left, if anything, will go to unsecured lenders. Hertz likely won't be able to satisfy them and may issue stock of a "new Hertz" and offer the creditors shares and equity of the new company that could rebound as travel and transportation return to normal -- a scenario that would, in theory, pay those creditors back over the long term. Those who own common Hertz shares in their current form get what's left after those two developments (which will very likely be nothing), and they will be wiped out as the company shifts to its new shares.
If you're still skeptical about this Hertz bankruptcy scenario, take a look at one of the world's top investors, Carl Icahn. Icahn had amassed nearly 40% equity in Hertz, at one point valued at roughly $1.88 billion. Last week Icahn, a shareholder with far more power, money, and influence than you or any other common shareholder, sold his 55 million shares for $0.72 cents -- about $40 million.
Yes, Hertz shares are soaring as life is breathed into the transportation sector, but for investors buying Hertz shares right now, it's hardly different from playing roulette at the casino, and that's not a healthy long-term investing mindset. Hertz shares in their current form are almost certainly going to end up worthless.