What happened
Shares of Hertz (HTZ +0.00%) plummeted 24% on Tuesday, after analysts issued multiple warnings to investors.
So what
Hertz filed for Chapter 11 bankruptcy protection on May 22, after the coronavirus pandemic and corresponding travel restrictions hammered its already struggling business. With little revenue coming in during the COVID-19 crisis, the vehicle rental company's crushing debt load became too much to bear.
Yet after hitting a low of $0.40 on May 26, Hertz's stock shockingly went on to rise more than 15 times in value by June 8. The gains were fueled in part by better-than-expected job figures and reports of rising airline passenger traffic, which gave some investors hope that Hertz's rental car business could recover.
However, Deutsche Bank analyst Chris Woronka said on Tuesday that while an economic recovery could certainly help the transportation industry, investors were likely underestimating the risk inherent in Hertz's stock. "The risk/reward is skewing a bit negative here, particularly given the inherent medium-to-longer-term risks that a resurgence or second wave of COVID could bring," Woronka said.
Woronka also questioned the "true depth of the buying" of Hertz's stock and posited that a short squeeze could be responsible for a large portion of its recent share price gains. A short squeeze can occur when the price of a heavily shorted stock -- such as Hertz -- rises rapidly, thereby forcing those who bet against the stock to buy shares to close out their short positions.
Hertz is a high-risk stock, according to analysts at Deutsche Bank and Barclays. Image source: Getty Images.
In addition, Barclays analyst Brian Johnson gave Hertz investors a "gentle reminder" on Tuesday that "[d]espite improving data points, Hertz has filed for Chapter 11 bankruptcy protection."
In turn, Johnson warned that Hertz's massive debt load would need to be attended to before any remaining value in its business could accrue to shareholders. "It's important to bear in mind that Hertz equity sits behind $14 [billion] of vehicle debt and nearly $6 [billion] of corporate debt -- all of which would be needed to be paid in full (either in cash or an equity stake) before equity holders could recover," he said.
Now what
At this point, speculating on Hertz's shares is a dangerous endeavor. Further short squeezes and momentum buyers could drive the stock still higher in the coming days, but there remains a high probability that shareholders will suffer a complete loss of capital if bankruptcy proceedings eventually drive the stock toward $0.
