Key Points
Avis Budget was experiencing a short squeeze, which fell apart this week.
The stock has traded wildly, which has little correlation to the underlying business performance.
Rental cars are a tough market to operate in.
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Shares of Avis Budget Group (NASDAQ: CAR) have collapsed 53.7% this week, according to data from S&P Global Market Intelligence. The care rental company experienced a massive short squeeze in the past few weeks, with retail traders piling in against large institutional short positions before the party ended.
As of this writing at 11:00 AM EST on Friday, April 24th, Avis Budget Group is in a 67% drawdown after rising over 500% at one point over the last month. Here's why the stock finally fell this week, and what investors should do going forward.
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Short squeeze gains turn to losses
A short squeeze can occur in a small-cap stock when a high % of its outstanding shares are sold short. Short sales occur when a stock is borrowed from an investor, who then sells it into the open market, aiming to profit by repurchasing it at a lower price. A short squeeze can happen when a bunch of investors try to buy back their shares at once, creating upward momentum in the share price that can get out of control.
Online investors looked at Avis Budget Group a month ago and saw the opportunity for a short squeeze, which finally occurred over the last few weeks. The % of Avis stock sold short was over 20%, while a large portion of the outstanding shares was held by institutional funds and not available for trading. This triggered a massive short squeeze once retail started piling into the stock.
This week, the short squeeze broke rapidly, with the share price down 54% as of this writing. When the market cap reached tens of billions of dollars, the short squeeze ran out of ammo, similar to what happened to GameStop years ago.
Image source: Getty Images.
Should you buy Avis Budget stock?
Piling into short squeezes is the exact opposite of what smart investors do: they focus on fundamental analysis. Looking at Avis Budget Group, the stock trades at a low price-to-earnings (P/E) ratio of 7.2. However, the rental car space is generally hypercompetitive with small growth prospects and higher disruption risk. Avoid buying the dip on Avis stock.
Should you buy stock in Avis Budget Group right now?
Before you buy stock in Avis Budget Group, consider this:
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Brett Schafer 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.
