The logo of the American car rental company Hertz is seen in western France.Stephane Mahe/Reuters
When a company's stock nearly triples in three months, it usually means management is selling a hot growth story. That doesn't seem to be the case, however, with Hertz Global Holdings Inc.
While a handful of positive developments have bolstered bulls – from better prices at the rental counter to a jump in posthurricane demand – it's short sellers who appear to be giving this surge its legs. "Short covering definitely played a role in this run up," said Barclays analyst Dan Levy, who has a price target of $9 (U.S.) for Hertz shares compared with Thursday's closing price of $23.59.
Though Hertz has Carl Icahn in its corner – with the billionaire holding 35 per cent of its stock and hand picking a management team to turn things around – the car-rental company is also heavily shorted. More than a quarter of the shares are owned by sellers betting against Hertz, and when a bit of good news buoys prices higher, some buy stock to cover their positions. That drives shares higher in the short term but gives the stock more room to fall.
"There's a lot of risk and many challenges here," Mr. Levy said in an interview.
A spokeswoman for Hertz did not respond to a request for comment.
Summer surge
After closing at $8.70 on June 21, the lowest since March, 2009, Hertz shares spiked 171 per cent through Thursday's close, sharply outpacing the S&P 500's 2.9-per-cent rise over the same period.
Some positive headlines helped support the summer's gains, including chief executive Kathryn Marinello announcing in August that Hertz had completed a "transformation" of its fleet to meet changing customer needs. Investors also expect bonus revenue from drivers needing cars in the wake of Hurricanes Harvey and Irma – with insurance policies funding the cost.
The storms will also drive up the prices Hertz gets when selling off its older fleet cars, which have been going at depressed values this year amid a weak used-car market. "People are underestimating how much the storm will help the rental companies," said Macquarie Capital Inc. analyst Hamzah Mazari, who has a 12-month price target of $17, or $6.59 a share less than Thursday's closing price.
Short sellers
Each time a positive headline gives the shares a boost, some short sellers get squeezed. Rather than see losses climb further, they buy stock at the higher rates and return it to the holder from whom they borrowed, fuelling the cycle of rising share prices.
As Hertz rose this summer, short interest as a percentage of its float climbed from about 30 per cent at the start of June to a peak of 55 per cent near the end of July, data from IHS Markit show. As the stock inched toward $20 and then passed it, some sellers ran for cover, but the short interest is still about 26 per cent of float. Rival Avis Budget Group Inc., also heavily shorted, has about 18 per cent short interest. That compares with 2.8 per cent, on average, for S&P 500 companies, data show.
Earnings justification
The biggest challenge for Hertz in the near term will be putting up enough in earnings to justify the soaring stock price.
Only two analysts rating the stock have a buy recommendation, according to data compiled by Bloomberg. The average 12-month price target is $17.38.