Why Hertz Stock Jumped Another 19% on Monday

What happened

Shares of bankrupt vehicle-rental company Hertz Global Holdings (NYSE: HTZ) jumped almost 20% in early Monday trading -- likely riding some momentum from Friday's $1.65 billion debtor-in-possession financing -- before reversing and giving back all those gains. Here's what investors need to keep in mind.

So what

After social distancing crippled travel and Hertz's rental demand, the company filed for bankruptcy protection on May 22 in a move that generally wipes out shareholders. Even famous billionaire hedge fund manager Carl Icahn threw in the towel and sold his more than 55 million shares.

Despite the likelihood of current Hertz shares ending up worthless for common shareholders, there continues to be a strange disconnect between the stock price and the reality of Hertz being a bankrupt company. That disconnect was in full force on Friday when the stock more than doubled as the company announced it had secured (subject to bankruptcy court approval) $1.65 billion in debtor-in-possession financing. That would enable Hertz to raise cash to continue operations while it finishes negotiating its bankruptcy with lenders.

row of rental vehicles

Image source: Getty Images.

Hertz will have a number of options, but it will have to satisfy major lenders that have financed its roughly $19 billion in debt before it can possibly offer common shareholders any value. The new financing will help the company operate while it restructures, but it simply puts more major lenders in front of common shareholders at the negotiating table, which makes an already small chance of shareholders receiving any value even less likely.

Now what

What this financing does show is that creditors see a future in the vehicle rental business. Indeed, the transportation industry, vehicle residual values, and rental demand have shown signs of life since the coronavirus initially swept over the nation. And Hertz is successfully executing its vehicle sell-off strategy that has taken its 532,000-unit fleet down to a projected 310,000 units by December 2020, a move that will help satisfy some debt and leave the company leaner upon emerging from bankruptcy.

Some factors remain undecided, and now the company has bought more time to negotiate with creditors. But shares of Hertz are still likely to end up worthless to common shareholders. The company may have a future, but it will likely be in a restructured form with new shares; that's one way creditors will get some value back for the financing they provided Hertz over the years.

So why did Hertz jump another 19% Monday? The answer could be that some novice investors are confused by the bankruptcy process, or that many investors are simply treating Hertz stock as something closer to gambling. Either way, long-term investors would be wise to watch these stock price swings from the sideline.

10 stocks we like better than Hertz Global Holdings
When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*

David and Tom just revealed what they believe are the ten best stocks for investors to buy right now... and Hertz Global Holdings wasn't one of them! That's right -- they think these 10 stocks are even better buys.

See the 10 stocks

*Stock Advisor returns as of September 24, 2020

Daniel Miller 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.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

Latest Markets Videos

    The Motley Fool

    Founded in 1993 in Alexandria, VA., by brothers David and Tom Gardner, The Motley Fool is a multimedia financial-services company dedicated to building the world's greatest investment community. Reaching millions of people each month through its website, books, newspaper column, radio show, television appearances, and subscription newsletter services, The Motley Fool champions shareholder values and advocates tirelessly for the individual investor. The company's name was taken from Shakespeare, whose wise fools both instructed and amused, and could speak the truth to the king -- without getting their heads lopped off.

    Learn More