Something extraordinary happened last week. As you can guess from the title, it has something to do with Hertz. Loyal readers know I like to throw shade at the Hares of the world, but I am also quick to point out their success.

I’m not going to try to push some new age personal growth narrative at you, but I do think it’s important to look at why other options succeed and fail as there is a lot you can learn from looking at alternative strategies. And Hertz may be the most successful Hare ever!

When Bankruptcy Pays Off

Hertz filed for bankruptcy just over a year ago. Their business had been struggling for some time as people used Ubers instead of renting a car when they traveled. It was going the way of the newspaper or the book store before Covid arrived. Covid was apparently the final straw as Hertz was levered to used car prices and fleet utilization, both of which dropped substantially during the early days of lockdown.

Typically, well actually almost always, when a company files for bankruptcy, it’s stock is wiped out as a condition of the reorganization. Carl Icahn owned almost 40% of Hertz before the filing. Because he knew the stock would be worthless after the filing, he sold out at 72 cents crystallizing almost $2B in losses in order to preserve some value.

Less than two weeks later, Hertz was trading over $5. What happened? Robinhood investors decided Hertz would survive bankruptcy as its business rebounded post-Covid and, not just survive, but still have residual value for the equity holders. There was no reason to believe this possible. As mentioned, Hertz was on a path to bankruptcy pre-Covid.

Hertz management may have been bad at financing rental cars, but someone there was savvy about the ways of the Hare and realized they could take advantage of irrational investors and try to save the company. So they announced a $500M equity offering! WHILE THEY WERE IN BANKRUPTCY!

This was so unprecedented that the SEC stepped in to ban the offering! Why? Because they understood that stocks in bankruptcy are worthless, so it would have been unethical for Hertz to sell worthless shares to investors. The SEC is filled with Tortoises!

What happened next? Hertz stock fell below $1 and it languished there for much of the next year largely forgotten about. Meanwhile…

The Car Shortage

While investors lost interest in Hertz and moved on to Dogecoin, GameStop, and other flights of fancy, something unexpected was happening. We started running out of cars. First, the OEMs began shutting down production due to Covid. This reduced dealer inventories and drove up prices.

In response, used car prices began to rise as people substituted. Remember, Hertz has a lot of exposure to used car prices because it relies on being able to sell its rental fleet after its useful rental life. This was good news event #1.

But that wasn’t the only bit of good fortune. As the economy started to open and people began to plan travel, they needed rental cars. Unfortunately for them, the rental car companies had sold off much of their fleet to raise cash. Now demand is up and supply is down. Uh-oh if you’re planning a vacation, but great news if you’re Hertz!

Suddenly, Hertz was a beneficiary of the re-opening boom just like the speculators predicted (even if in a way they never saw coming)! Sometimes, it is better to be lucky than good, though likely few of the original speculators maintained their diamond hands and benefited.

The Payoff

Wait, did I say the speculators won? How? It’s great that the business rebounded, but the stock was still worth $0 in bankruptcy, right? Nope, private equity investors have bought Hertz out of bankruptcy at a price that didn’t just make the debtholders whole, but is worth nearly $8 to the shareholders!

So those who bought at $5 a year ago, are up ~50%. Ironically, they only made that much because the equity offering fell through. The offering would have been executed well below $5 and would have increased the share count, so it may be that the SEC saved the speculators from losing money by preventing the dilution!

The Lesson

One can argue that Hertz wasn’t really a Hare since they didn’t raise free capital when it was available. However, the fact that they were brazen enough to attempt the unprecedented is good enough for me. Yes, someone like AMC who took advantage of speculators to stave off bankruptcy is probably the bigger bottom line winner, but they were copying Hertz’s playbook: take advantage of free capital when it’s available.

It’s rare that capital is free and the window may be closing, but when it’s available, it creates immense value if you can capitalize on it before it disappears. Hertz set the example that many others have followed in the year since, so if you’re a Happy Hare, next time you need a rental, make sure to give your business to Hertz.