The Weirdest Investment Bubble I’ve Ever Seen — The Bankruptcy Bubble

Throughout history we have always seen investment bubbles.

Times when investors flock to certain industries or assets. Often pushing the value of these investments to unsustainable and unfathomable levels.

You’ve no doubt heard of a few of them yourself.

One of the more famous examples is the dotcom bubble of the NASDAQ back in the early ‘00s. Or going further back in history, the tulip bulb mania of Holland in 1637.

Hell, some people would still even argue that our property market is in the midst of a bubble.

Point is, bubbles have and likely always will be a part of investing. It is simply a part of our DNA as a species.

People can’t help making bubbles. They get greedy, not wanting to miss out on what can often seem like ‘easy money’.

It’s proof of the emotional, albeit irrational, flaw many of us share. Something that we all should be aware of and should do our best to control.

At least, that’s what I believe.

As I said though, I seriously doubt we’ll ever see bubbles disappear for good. Because every time it seems as though people have learned from the mistakes of the past, another example just pops right up.

Which brings us to one of the most bizarre investing anomalies I’ve ever seen or heard of. A bubble in the making that honestly even has me scratching my head…

Like watching a car crash

Let me start by introducing you to Hertz Global Holdings Inc [NYSE:HTZ].

I’m sure you’ve at least heard of this car rental company before. If you’ve ever been to an airport you’ve no doubt seen a bunch of their cars on show.

They were one of the titans of this industry. A company that in its heyday was valued at US$12.4 billion.

But then the ride-sharing revolution happened.

As Uber paved the way for a new way to get around, car rentals faced a challenge. It certainly wasn’t the only headwind for the sector, but it was one of the most prominent.

For Hertz it was also the beginning of the end.

Their share price has been in a steady decline ever since 2014. Back when Hertz was trading at all-time highs of well over US$100 per share.

By 2017, three years later, the stock was down to just US$20 per share. A level that the company would hover around up until February of this year.

They were a stagnant company struggling to find relevancy.

And then the pandemic hit…

Like many industries, the rental car market was practically decimated overnight. With everyone forced to stay at home, no one was out renting cars.

Hertz was feeling hurt, as their market evaporated before their eyes. As did shareholder equity.

The share price tanked from just over US$20 per share on 21 February, down to a low of 56 US cents on 26 May. Four days after the company had officially declared bankruptcy.

One of the biggest corporate names to succumb to the impact of COVID-19.

But then something strange started happening…

New names actually started investing in Hertz. Retail investors suddenly flocked to the stock in droves, pushing the share price higher. As Bloomberg reported overnight:

In the three sessions through Monday, Hertz shares surged 577%, just weeks after the company filed for bankruptcy. Trading volume in the stock has surged to an average of 197 million shares a day in June – more than 60 times what was typical in 2019.

For some reason people where buying into a broke stock. And it wasn’t the only one.

Braindead or brilliant?

Right now, in the US, some people are actively seeking bankrupt or near-bankrupt stocks. Investing their money into companies like JCPenney, Whiting Petroleum, and Chesapeake Energy.

Stocks that have all been savaged by the coronavirus. And yet, they’ve all posted double or even triple-digit gains in recent days.

It’s more than just a handful of cases of a ‘dead cat bounce’. It’s a bankruptcy bubble.

One of the most bizarre, and yet effective, get rich quick schemes I’ve ever seen. Yet another example of just how easily mania can grip a market.

But you’ve got to hand it to them, it is working for now.

As for why it’s working, well that’s tough to say.

Like any bubble, there is no fundamental reason for the surge in these stocks. It is being driven purely on speculation. Granted, it’s not your typical speculation either.

Normally a bubble is fuelled by speculation on demand or supply. Namely, that a particular asset or good will increase in value because of its desirability or scarcity.

When it comes to this bankruptcy bubble though, it’s likely quite the opposite. I doubt many of the investors actually believe that stocks like Hertz are diamonds in the rough.

Instead, they are likely investing because of the Federal Reserve.

As we’ve seen, Powell and Co have been on a spending spree. Using QE to buy up dud assets in order to prop up the market.

For these bankrupt companies, that means they might get a timely bailout. The Fed could swoop in to save them with a fresh bag of cash that investors may then have a claim too. At least, I have to imagine that’s the thinking.

In reality, I doubt few shareholders will actually get a return on their equity. Only the ones smart enough to get out before the bubble bursts will be winners. Everyone else will simply be left holding the bag at the end.

Personally, I’d be steering very clear of this anomaly with my money. It is not the sort of thing worth risking your capital on.

But it is a fantastic insight into just how demented certain sectors of the share market are right now.

As one market strategist quipped to Bloomberg:

At what point will Jay Powell and his colleagues at the Federal Reserve realize they have broken the market’s pricing mechanism? The bankruptcies are only a small part of the story.

At what point indeed…


Ryan Clarkson-Ledward,
Editor, Money Morning

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Ryan Clarkson-Ledward is an Editor at Money Morning.

Ryan holds degrees in both communication and international business. He helps bring Money Morning readers the latest market updates, both locally and abroad. Ryan tackles all the issues investors need to know about that the mainstream media neglects.

Ryan is also the Editor of Australian Small-Cap Investigator, a stock tipping newsletter that hunts down promising small-cap stocks by dissecting the latest events affecting the world.

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