Hertz (NYSE:HTZ), a vehicle rental company now in the middle of the bankruptcy process, continued to mystify market onlookers as its share price jumped 21% Tuesday morning before quickly reversing course and diving back into the red. What in the world is going on with this stock?
One piece of data that may help explain Hertz stock's volatility Monday and Tuesday is that its bankruptcy judge has approved the company to issue up to roughly 246 million new shares, a move that would allow it to take advantage of the recent speculative run-up in its stock price. That's certainly a significant amount, given that Hertz currently has roughly 142 million shares outstanding. This stock offering will not only cause dilution by most definitions, it will add interesting pressure to the stock price. One theory behind the stock's speculative rise was a short-squeeze, and when a surplus of shares are added it could effectively end the short-squeeze by allowing new short-sellers to put in their new short orders. Remember the stock is likely going to zero, making it enticing for shorts, and some who wanted to weren't able to borrow shares to short previously. All of this has the potential to add downward pressure to Hertz's stock price. Ultimately, Hertz shares will continue to be volatile throughout bankruptcy.
The path of Hertz stock over the past few weeks could be described as a slow-motion train wreck that will almost certainly end in its common shares becoming worthless. The New York Stock Exchange notified Hertz that it will be delisted, a decision that the rental company is currently appealing, but if that happens, the shares will become less liquid as fewer people will be able to buy and sell them.
Even Hertz management reminded investors of the risk associated buying its shares now: "We also expect our stockholders' equity to decrease as we use cash on hand to support our operations in bankruptcy. Consequently, there is a significant risk that the holders of our common stock will receive no recovery under the Chapter 11 Cases and that our common stock will be worthless," the company noted in its recent Form 8-K SEC filing.
Take Hertz stock's volatility with a grain of salt, and also with the understanding that some traders are playing a dangerous game -- buying and selling shares that are likely to end up with no value. Long-term investors would be wise to watch this corporation's collapse from the sidelines.