Retail shareholders in the U.S. are piling into stocks of bankrupt companies in a sign of the speculative investment wave sweeping across the U.S. market.
Shares in car rental company Hertz Global Holdings Inc. (HTZ-N) and retailer J.C. Penney Co. Inc. (JCPNQ-OTC US) have more than doubled in value since the start of the month despite both companies wading through bankruptcy proceedings that could end with the stocks falling to zero.
Many professional fund managers and analysts are stumped at the risky bets, but a growing army of have-a-go retail traders is willing to wager that last-minute turnarounds for the companies might deliver gains on deeply depressed stock prices.
The rally in speculative stocks has only intensified the divide between markets and the economy, with the longest U.S. expansion on record ending in February as COVID-19 hit the country. Despite a double-digit jobless rate, the benchmark S&P 500 is only marginally lower for the year. On Tuesday, it briefly recouped the entirety of its losses since the year began before losing steam in the following days.
Users of Robinhood Markets Inc., the Menlo Park, Calif.-based stock trading app, have bought more shares in Hertz over the past few days than in any other listed U.S. company, doubling bets in a week, according to data tracking holdings on the platform.
“When the retail investor starts to view the market as a one-way bet it’s usually an alarm bell and that does seem to be happening,” says Paul Markham, global equities portfolio manager for Newton Investment Management in London.
Hertz filed for Chapter 11 bankruptcy protection in May, sending its shares down by 80 per cent. But since then, the shares have gained more than 800 per cent as retail investors shrug off news that prompted professional fund managers to sell. The company has US$18-billion of debt and faces the prospect of selling its fleet of used cars into a shaky market.
The run-up in Hertz’s stock price doesn’t “make any sense whatsoever,” said Glenn Reynolds, chief executive of CreditSights Inc. on a call with investors on Monday, alluding to the role of retail investors. “But as long as everyone out there is having fun trading, we won’t begrudge them that.”
Shares in J.C. Penney are up by 472 per cent from the low they struck last month when the company filed for bankruptcy, buckling under the weight of its debt during coronavirus shutdowns that have kept millions of Americans indoors.
A similar trend has played out in the energy sector. Shares in Whiting Petroleum Corp. (WLL-N) leapt by 150 per cent on Monday, sending the stock more than 1,000 per cent above its low in April – the month it filed for bankruptcy. Chesapeake Energy Corp. (CHK-N), which is on the verge of bankruptcy, jumped by 180 per cent on Monday.
Investors may be holding out hope that the U.S. government will take action to save certain companies from collapse, akin to the bailouts of the car sector during the global financial crisis, Mr. Markham says.
The buying reflects “retail investors betting that there will be a big enough recovery for these companies to come out of Chapter 11 or for additional government intervention to save some of [them],” he adds.
Some of the troubled stocks, including Hertz, were much weaker later in the week. Peter Boockvar, chief investment officer of Bleakley Advisory Group, wrote in a note that rapid rises were a clear sign of “froth” in parts of the market.
“It’s great that Las Vegas is open again but who needs it when you have the stock market instead?”
Additional reporting by Eric Platt and Joe Rennison
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