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I'm About to Be Proven Dead Wrong About This Robinhood Stock

By Dan Caplinger - May 14, 2021 at 4:33PM

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It looks like what appeared to be a sure loser could end up paying off after all.

Friday brought more relief to Wall Street, as major market benchmarks gained around 1% to 2.5% on the day. The Dow Jones Industrial Average (^DJI 1.27%), S&P 500 (^GSPC 1.73%), and Nasdaq Composite (^IXIC 2.09%) weren't able to claw back all of their losses and were still below their all-time highs, but the gains nevertheless reassured some investors who'd gotten nervous at the volatility earlier in the week.

The one constant in investing is that there's no such thing as a sure thing. I was just one of many different Motley Fool contributors who predicted with great certainty that Robinhood stock favorite Hertz Global Holdings (HTZG.Q) would prove to be utterly worthless for shareholders. Below, I'll explain why it's increasingly likely that all of us will turn out to have been dead wrong about Hertz going to $0.

Person handing papers to another person across a counter, with Hertz logo on wall.

Image source: Hertz.

How the market fared on Friday

The stock market rose on Friday, adding to its rebound from Thursday. The Nasdaq led the way higher, but all three indexes had sold gains.

Index

Percentage Change

Point Change

Dow

+1.06%

+361

S&P 500

+1.49%

+61

Nasdaq Composite

+2.32%

+305

Data source: Yahoo! Finance.

How Hertz might survive

Shares of Hertz rose 6% on Friday. The rental car giant's stock has doubled this week, as more investors slowly realize that bankruptcy might not prove to be the coup de grace for Hertz.

It turns out that the long-awaited recovery in travel is driving extremely favorable conditions for the rental car industry. Many people are scurrying to get out of town for the first time in more than a year. However, many rental car companies had to sell off big portions of their vehicle fleets in order to survive financial catastrophe during the pandemic. That's pushing rental car prices sharply higher. Moreover, shortages of semiconductor chips are forcing automakers to curb production of new vehicles. That has increased demand for used cars and trucks like the ones that rental car companies often look to sell once they've reached a certain level of use, boosting their prices as well by the largest one-month amount since tracking began in the 1950s.

As a result of this rebound in the industry, opportunistic creditors and institutional investors are fighting each other to get the bankruptcy court to approve their respective reorganization plans under which Hertz will emerge from bankruptcy protection. Earlier this week, Hertz picked a bid from private equity companies Knighthead Capital, Certares Opportunities, and Apollo Global Management (APO).

The proposal will not only pay creditors in full but also boost the expected recovery for current Hertz shareholders. Specifically, shareholders will share in a $239 million cash payment, common stock in the new business entity representing 3% of total shares, and a choice between long-term warrants for more shares or the chance to subscribe to buy additional Hertz stock at the same price private equity players will pay.

The bankruptcy court is scheduled to confirm the Hertz plan on June 10. At that point, those who held on to their Hertz stock through thick and thin will find out whether their patience will pay off.

Never say never

The only thing I can say in my defense is that I did leave open the possibility that this sequence of events could save Hertz. Rising travel demand, a reopening economy, and higher used vehicle prices had to align, I argued, in order to get shareholders a recovery.

Nevertheless, saying that it wasn't impossible but not too likely doesn't get me off the hook. If creditors have their way, devoted Hertz shareholders might well have their day in the sun in the near future.

Dan Caplinger has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Hertz Global Holdings, Inc. Stock Quote
Hertz Global Holdings, Inc.
HTZG.Q
Dow Jones Industrial Average (Price Return) Stock Quote
Dow Jones Industrial Average (Price Return)
^DJI
$33,761.05 (1.27%) $424.38
S&P 500 Index - Price Return (USD) Stock Quote
S&P 500 Index - Price Return (USD)
^GSPC
$4,280.15 (1.73%) $72.88
NASDAQ Composite Index (Price Return) Stock Quote
NASDAQ Composite Index (Price Return)
^IXIC
$13,047.19 (2.09%) $267.27
Apollo Global Management, LLC Stock Quote
Apollo Global Management, LLC
APO

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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