Main Street takes on Wall Street
Bankruptcy stock frenzy challenges investing norms
When Bryan Quevedo received his US government stimulus check last month, he invested $1,000 in the stock of bankrupt car rental company Hertz Global Holdings Inc.
The 22-year-old Los Angeles delivery driver made the trade on Robinhood, an app that allows mom-and-pop investors to buy and sell shares. A marketing graduate who has struggled to find an office job amid the COVID-19 pandemic, Quevedo analyzed Hertz’s share price movements to predict that the stock had hit bottom. After four days, he had doubled his investment.
It is a trade that goes against Wall Street norms and is not for the fainthearted. Hertz has warned that its bankruptcy process could render its shares worthless. Investors are betting on how high they can push the shares and risking big losses if they can’t quickly flip them to someone else.
“I’m just waiting for the price to go higher or break even so I don’t lose any capital,” said Quevedo, who has since invested another $450 in Hertz stock. He posted a screenshot of his profits in his Robinhood account on social media and recommended the trade to several friends.
Hertz did not immediately respond to a request for comment.
Quevedo is one of tens of thousands of traders who sent Hertz’s shares rallying a few days after it filed for bankruptcy protection on May 22, many of them on the Robinhood app.
Other shares of bankrupt companies, such as J. C. Penney Co Inc and Whiting Petroleum Corp, have seen similar rallies. Shares in some obscure penny stocks have soared.
Pundits have struggled to explain the frenzy of speculation. Record savings, low interest rates and even lockdown boredom in the wake of the coronavirus outbreak have all been cited as possible explanations for the extraordinary market moves.
Robinhood did not respond to a request for comment on the surge of trading of bankruptcy stocks on its platform.
A Reuters review of social media posts identified a community of amateur traders who are defying warnings from finance experts and betting they can outsmart Wall Street. Many say they’re seeking quick profits and hoping not to be the ones left holding the bag if the shares they invest in suddenly collapse.
“I see a lot of people missed the boat to get rid of Hertz stock. I like that gamble. That’s what I do with my bar money,” said Joseph Madison, an urban planner in Atlanta, Georgia. A cryptocurrency investment veteran in his early 40s, Madison said he scored a return of 174 percent by investing “a few hundred bucks” in Hertz stock over the past few weeks.
Hertz itself has noticed. It launched an effort this week to sell $500 million worth of its stock in the open market, a remarkable move for a company in bankruptcy.
However, CNBC on Wednesday reported that Hertz has suspended its plan after the US Securities and Exchange Commission (SEC) voiced concern about the deal and launched a review.
Hertz in a regulatory filing Wednesday said the sale was “promptly suspended pending further understanding of the nature and timing of the Staff’s review,” the report said.
The SEC, according to the filing, verbally told the company of its plans to review the sale on Monday. Hertz said it has remained in “regular contact” with the agency this week.