In the world we live in today, less and less things that would have seemed absurd just 6 months ago, shock us now. Just recently, oil contracts actually went negative, meaning you had to pay someone to take oil off your hands. We discussed this in more detail in a previous newsletter article. This month, one of the stranger occurrences which we witnessed was the purchasing of a stock that had declared bankruptcy. In this scenario, equity holders are the last to be compensated, with more senior debt first in line. In a bankruptcy, the business is wound down in order to try to compensate the bond holders whereas the equity is usually worth zero.
Towards the end of May, the vehicle rental and leasing business, Hertz Global Holdings, filed for bankruptcy. The share price had already come off considerably into the pandemic, dropping from around $20 to $3.40 before bouncing back to $8. News of a possible bankruptcy started circulating and this was being reflected in the share price coming off the $8 level. But just when the equity value was close to zero, reflecting a bankrupt scenario, a surge of buying lifted the price back to $5, up over 1 000% from the lows. Was there a fundamental reason to be buying this stock? There could be some situations where the equity has some small value but in this situation we do not think that was the case. One reason for this is that this buying of defunct business shares was seen in other situations. Shares in businesses that were shown to be fraudulent like the Chinese company Luckin Coffee were being purchased, pushing the share price up 45% in a single day. At the time of writing, the price of Hertz has come back from the $5 level to $1.50. As if the scenario wasn’t strange enough, based on the share price surge, the company then looked to sell up to $1bn of stock into the market to realise cash for the bankruptcy process while simultaneously indicating that equity investors were likely to be wiped out.
It is a widely held belief that the demand was all retail, coming from a trading platform called Robinhood where Hertz was the most favoured stock on the platform at one stage. It is also believed that a significant proportion of the 'traders' on this platform are very young. If this situation isn’t strange enough, there were comments circulating on Twitter from people saying their children's time for playing the popular online game Fortnite needed to be altered to accommodate their friends trading time on Robinhood. So, welcome to this bizarre world of pandemic, isolation and children reducing TV game time to focus on their 'portfolios' by buying bankrupt and fraudulent businesses.