During market turmoil, many investors turn to news sources for answers – advice, guidance, or a new idea to capitalize on the turmoil.
This can be a dangerous strategy. Enter stage right, Hertz. A few days ago, I was watching CNBC when a breaking news alert came across the bottom of the screen. It said, Hertz up 500+ percent in three trading days. If you were watching, you might think that Hertz just might be that new idea.
You Can’t Judge a Book by Its Cover
On May 22, Hertz filed for Chapter 11 bankruptcy protection. Under Chapter 11, a court will help the company restructure its debts and obligations, which gives the company a fresh start. The firm’s management oversees daily operations, but the company must direct significant business decisions (e.g. stock issuance and debt decisions) to the bankruptcy court for approval.
Chapter 11 can prevent companies from shutting down completely. However, in some cases, the company’s stock becomes worthless and shareholders are completely wiped out.
A day after Hertz announced its Chapter 11 filing, the stock’s trading volume increased 500 percent. In the 60 days prior to the announcement, Hertz’s daily trading averaged 15 – 25 million shares. In the two trading days following the announcement, Hertz’s trading volume increased to 140 million and 345 million shares, respectively. Additionally, the share price dropped 80 percent. News stations salivate over trading volume changes like this. They turn these occurrences into breaking news and only then does the public become aware of the activity.
As the news started to fizzle out, so too did the trading volume until Hertz announced it would be petitioning the court to sell more stock. While the idea of a company on the verge of bankruptcy wanting to sell $1 billion in stock is crazy, the way the stock price reacted was even crazier.
Trading volume skyrocketed and so did the stock price. The day before the announcement, 38 million shares were traded. However, after the announcement, over 533 million shares were traded. “Hertz looks at the market and sees there is a group of irrational traders who are buying the stock, and the response to that is to seek to sell stock to these people in hopes of raising some amounts of money to fund their restructuring,” said Jared Ellias, a law professor at the University of California Hastings college of Law
Just days later, CNBC rolled out a breaking news alert: Hertz up over 500 percent in three trading days.
On June 12, The U.S Bankruptcy Court of the District of Delaware approved Hertz’s request to sell $1 billion in stock. In a statement to the Securities and Exchange Commission (SEC), Hertz said;
“Although we cannot predict how our common stock will be treated under a plan, we expect that common stockholders would not receive a recovery through any plan unless the holders of more senior claims and interests, such as secured and unsecured indebtedness (which is currently trading at a significant discount), are paid in full, which would require a significant and rapid and currently unanticipated improvement in business conditions to pre-COVID-19 or close to pre-COVID-19 levels.”
I underlined and bolded the most jarring part of the statement. The management team is effectively telling the whole world and their regulating body that they expect stockholders to lose their money by purchasing the new stock.
Unless you were looking at the SEC statement, the headline Hertz to sell up to $1 billion in stock could be interpreted as another opportunity to jump on the wave of additional gains.
The Hertz timeline is WILD!
If you just followed the headlines, you wouldn’t know which way the stock was going. Even if you did, you probably wouldn’t believe it.
No one in their right mind would believe a company could get approval from a court to sell $1 billion in stock while on the verge of bankruptcy, knowing it expected their stockholders to lose every dollar invested. Also, no one would ever imagine that the price would jump over 500 percent on that news.
In the span of just 15 trading days, the price of the stock dropped 71 percent, went up almost 900 percent, dropped 63 percent, and then bounced up one more time by almost 40 percent. The actual 15-day return was -0.35%
If these two weeks teach us anything, it’s that long-term investors should not buy when all you have read is the headline. Headlines are meant to provoke interest and emotion; the rest of the story tells so much more.