Why the 128% Pop in Hertz Stock Is Absurd

What happened

Shares of Hertz Global Holdings (NYSE: HTZ), a vehicle rental company going through the bankruptcy process, soared over 128% Friday afternoon after news spread that the company secured $1.65 billion in funding -- but here's why investors should temper their excitement.

So what

At first glance investors might think Hertz securing $1.65 billion in funding to continue operations during the bankruptcy process would be a good thing -- especially considering the stock price jumped over 128%. But let's first explain what debtor-in-possession financing is, and what it means for investors. Debtor-in-possession financing is only available for companies in bankruptcy. It's used to orchestrate the reorganization and allow the company to raise capital to continue operations while the bankruptcy process continues.

Car rental sign

Image source: Getty Images.

While the funding seems like a positive development, the opposite might be true for Main Street investors. Hertz already has a mountain of debt and almost $15 billion of its total $19 billion of debt is linked to the company's vehicle fleet. At the end of the day the major lenders that helped finance the company's vehicle fleet, among other major lenders, will receive whatever value is left of Hertz in whatever path they choose, be it liquidation or restructuring and owning shares of a new company. Whatever is left after the major lenders negotiate their fair share will be distributed to common shareholders -- and there's a good chance there will be no value left for common shareholders with Hertz's high debt levels. Now, there's another $1.65 billion of debt from people that will hit the negotiation tables long before common shareholders, making it even less likely common shareholders receive any value.

Now what

"This new financing will provide additional financial flexibility as we continue to navigate the pandemic's effects on the travel industry and take steps to best position our business for the future," said Hertz president and CEO Paul Stone in a press release. That statement can be true and can also be slightly misleading. If you take one thing away from this article let it be that Hertz may indeed have a future in the vehicle rental business, but it will almost certainly be as a restructured company trading under new shares, and the Hertz shares we know and trade today will likely end up worthless. Don't let the funding hype and 128% stock price pop fool you, you should watch this from the sidelines; there are many more intriguing automotive investments out there.

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