Mr Market Gifts Free Money to Hertz
There used to be a Nobel Prize waiting for the economist proclaiming efficient markets, where stock prices always get it right, and nothing is ever over or undervalued. It’s a staple of business degrees. It’s academia’s contribution to investing, but it’s also a load of absolute hogwash. The recent shenanigans around Hertz prove this once and for all!
Hertz sent a proposal last week to a judge to sell one-billion-dollars’ worth of new shares. This is a move to raise cash, but you never see it from bust companies; it makes no sense.
The price of a bankrupt company’s stock should be too low to make this effective, but such is the irrationality of traders at the moment, Hertz can indeed sell new shares to the market, and for an absolute fortune. Hertz is raising a ton thanks to a bottom-fishing, dip-buying bubble led by Dave Portnoy, and no, it’s not illegal. The judge said “yes!”
Hertz will use its raised capital to fund its restructuring process. The car-rental business hopes to make things whole with debtors and come back stronger, if not smaller. The restructuring process will crucially lead to debtholders claiming the entire equity, which is to say current shares are worth nothing to current investors. The irrational part is then how funding for Hertz to go through this process is coming from current investors.
You can’t blame Hertz directors. Hertz has filed for bankruptcy. The directors represent the debtors now, not the equity holders. It may be a daylight robbery, but dumping worthless stock onto uninformed investors to “benefit the estate” is exactly their duty.
The crux of this is that investors are uninformed in this moment. Some think popular zero-commission brokers should answer for this, but not really. Others think the judge should have stepped in, or regulators, but we need to be careful about confiscating freedom in a free market. Better to think about “accredited investor” rules again, ensure financial advice comes from financial advisors (not Dave Portnoy from Barstool Sports), and focus on education (Invstr Academy Challenge anyone?).
Hertz shares are still not delisted from the New York Stock Exchange (NYSE). The volatility in trading has kept them alive, but expect the situation to look vastly different at the end of the week. Also, stay alert to other viral stocks defying fundamentals. We’re living in crazy times!