Carl Icahn Bails on Hertz as They Declare Bankruptcy


Hertz has been renting cars for over a century and started out with a dozen Model T’s in 1918. They have flourished through a lot of crises, but were no match for an economic shutdown.

Hertz has had a dominant position in the rent-a-car business for a century, from the time they started out with a single location offering rentals on Model T cars and built it to the biggest rent-a-car business in the world for a very long time.

For many years, their top competitor Avis told people that they were #2 but they try harder, and it was Hertz that they were trying to catch at #1. They didn’t try hard enough it would seem, but Enterprise did manage to pull this off and pass both of them, but Hertz still remained in the top two.

Once COVID-19 put the brakes on people travelling, any businesses that relied on travel to make their money took a big hit, and when you don’t travel, you don’t need to rent a car at your destination. This was a time to bail on whatever stock positions you have, much like the siren goes off when a major tsunami is headed your way and you have to flee for your life.

A lot of people didn’t pay attention to the siren though, and if you owned shares in a rent-a-car company, this put you on the shore when the tsunami came and simply levelled you. Hertz may have had plans of rebuilding after the devastation they suffered, but this does not mean that it makes sense to ride the stock all the way down to close to nothing, with the hope of making back the losses that you could have easily avoided by just running from this beast.

Among those who hung on was Carl Icahn, who will always be remembered as the corporate raider that bought TWA and stripped them bare and contributed to their ultimate death. This is just one of many attempts to raid companies, and he is by far the biggest legend among the stock pirates.

Icahn owned 39% of Hertz, and as the business became deathly ill during the lockdown, he refused to sell. Icahn could afford to hang on even though he had a $2 billion in the company before this all started, as he began the year with a net worth of $16.7 billion, plenty enough to lose a couple billion and not feel it beyond the bruising his ego might take.

Icahn held on to his Hertz shares right up until the point where the company declared bankruptcy, and the shares dropped from over $45 in July 2016, to $20 this past February before the plunge, to less than a dollar when he finally put this position out of his misery, selling at a meager 78 cents a share.

If Icahn was hoping to sell at the bottom like Warren Buffett did with his airline stocks, he traded this perfectly, as the very next day the stock got back over $1 on huge volume. The vultures that look to play rebounds with distressed stocks were all over this, and not without good reason, as when you go bankrupt it really doesn’t get much worse than that.

It’s not that airline stocks have come up all that much, but a 25% return from where Buffett exited at the bottom to where they are now, in just a few weeks, is a plenty nice return already to say the least. Investors pray for that much return in a whole year. These stocks have so much more potential from here.

The reasoning behind these two massive exits, both Buffett’s and Icahn’s, are really worth examining in detail, as individual investors can make the same mistakes, although perhaps not as blatant as these two horrible moves. We can call this already because both these airlines and the rent-a-car business that is tethered to them can only get better, and as it does, the stocks will benefit even if they never get back to what they once were before this economic tragedy struck.

Both of these gentlemen are long-term investors and both told us they got out because they didn’t like the long-term prospects of these companies. We can’t argue with that, but we can definitely argue with the timing of these plays, which were beyond terrible.

We need to revisit the airline scene to speak a little about what Buffett walked away from, and then move on to Hertz. Airlines were virtually put out of commission by this, where we saw passengers drop by 95%, and with just about all of their planes parked. Even if there is residual fear that carries over from COVID-19, these infections don’t last all that long, and airlines returning was never in issue.

Buffett held a pretty big position in all four airlines, and their routes are valuable so it’s not that any of them and especially all of them were ever at risk of closing shop entirely, and the worst we would see is their sold to one of the other airlines in an acquisition deal.

Those of us who actually thought about this pandemic enough to not just believe the exaggerations that the media and officials perpetrated were given a big leg up when it comes to figuring out what to do with our stocks. An example of this is the continued rally in the stock market due to our not seeing the tidal wave of death spread through the country that was predicted, even though the very idea of such a thing was quite ridiculous based upon the actual data.

Airline stocks came back a little when we saw things open up again, and this was bolstered by the fact that re-opening is not causing a wave of death that we have been warned that it would. Stocks took a much bigger beating than they did because of the effect of fear, and when fear subsides, its effects upon the market do as well, as we move from fearful to more hopeful.

These are the two central factors in the movement of stock prices, fear and hope. They not only affect stock prices but they actually do all the work, and every other factor only contributes to stock price movement to the extent that they change how much fear or hope that we have.

We Need to Sell When Hope Wanes and Buy When It Is Back in Play

Both men sold out at the point where hope was at its lowest point, and while we do need to act on fear when the market feels it, we also need to look for a time when the fear eases up and hope takes over. When you are shut down like this, this will cause a stampede, one that ends up overdoing the losses due to the momentum of fear involved.

Once this effect dies down, this means that the pressure on the stock to go down eases, and together with the pressure on it going up increasing, this is not a time to sell. It’s actually a good time to buy if anything, and by extension, to hold as well, because unless it’s a good time to buy, it isn’t a good time to sell as already owning it and just buying it isn’t just similar, it is identical.

The same thing applies to Hertz, even when filing for bankruptcy. There are some cases where companies go bankrupt and then go away. TWA went bankrupt a couple of times before things got so bad that their bones were bought by American, and often times, a company declares a Chapter 11 bankruptcy to be able to write off debt that has ballooned beyond their being able to manage it. If they have enough enduring value, this allows them to be reborn, not die.

There’s no question that Hertz will be taking a big hit from all this either way, and this is not a matter of seeing their stock even get back to the $20 it traded at 3 months ago, let alone the $40 that it was worth in better times. This is the part that investors miss, even ones as iconic as Warren Buffett and Carl Icahn it seems.

Investors generally do not even ever want to think like a trader, but there are times where the choice becomes between thinking like a trader and thinking stupidly. The airlines, the rent-a-car companies, the hotels, the casinos, the cruise lines, the restaurants, the retail sector, and every other business that has been decimated have turned into trades now, as the market did as a whole to a considerable extent.

A trader would see this as an opportunity, and would have been long gone from these stocks unless they were shorting them while the panic was rampant, and knowing what panic does to stock prices, where they drive them down way too much, they would have laid in wait until it was over and then jump back in then.

The plan would not be to even care where these businesses are headed in the longer-term, whether they ever return to their former glory or not, or even whether their longer-term future is good enough to make them competitive with being in something else with better prospects over this time period.

Instead, this is all about riding the wave up as we put the panic that drove these stocks down so much behind us to a certain degree, and we don’t have to get rid of all of it, and just seeing it go down by half is enough to make a lot of money off of.

The opportunity cost of going long-term with Hertz versus a company that is both doing well and is expected to grow at an above average pace is clearly too high, and no one should be willing to pay such a price. Investors need to pay a whole lot more attention to this than they do, which is virtually no attention at all, and they will hold terrible stocks for years with nothing to go on but their own hope, which is very often misplaced.

An extreme example of this would be with a stock like JC Penney, which we wrote about last year and wondered in awe how people could justify holding a stock that has been so sick for so long. People do this with all sorts of other junk though, underperformers who continue to underperform because the market itself isn’t anywhere near as hopeful with them as they are with the better performers.

When the market becomes more hopeful about a stock, this does not require any insight or skill to be able to tell, as you can see it happen right before your eyes, as hope puts stock prices up and lack of hope puts them down and keeps them there.

This is the reason why trend following does so well, and why ignoring trends does so dismally. Sometimes we do need to do a bit of thinking though, for instance wondering what the hope is of airline stocks or Hertz recovering a fair bit of what they lost back. While looking at value with stocks is usually a big mistake, when they get this oversold and the reason behind it is a temporary one, this does represent not only value but the plays can have tremendous value.

The goal of Hertz is to reorganize their balance sheet by using an eraser, and the plan is to put the great toll of the lockdown behind them and look to rent cars again at scale successfully. Their scale may be less, but this doesn’t matter, as once again we don’t need to see them get back to $20 a share or even $10, as at $1 a share, even if they just get to $2, you double your money.

The potential for Hertz to come back is significantly higher than just doubling your money from here, although in the midst of bankruptcy this is going to require more patience than these trades usually require, but people like Warren Buffett and Carl Icahn have plenty of that, too much usually.

We don’t want to make the mistake of thinking that they have lost so much already that they don’t have much more to lose, when you have $2 billion in stock and see this go down to less than $100 million, where the loss of almost $2 billion hurts plenty enough and losing another $100 million even if the stock expires worthless isn’t going to make much of a difference.

We Might Not Care About the Shorter Term, But Sometimes We Must

This commits the terrible mistake of confusing the past with the present and future, and not understanding that what has happened in the past has already occurred and our own outcomes do not shape the future. This is a mistake a lot of traders make as well, and while this is deadly if you are a trader, it can cause a lot of pain with investors as well.

Somehow, losses that are not booked aren’t really seen as losses, where you might be down but you are thinking that only losses from concluded trades matter and losses still in positions don’t count. You got in to make money and have lost a bunch of money instead, and instead of doing the right thing and cutting your losses in a situation that has clearly turned against you, you hang on and hope.

The past does play a role in our decisions about the future when in positions, but only as a general point of reference. The market doesn’t know or care how much we are up or down and certainly doesn’t owe us anything. Being down in a trade is nothing more than an unfortunate circumstance and we can never have how much we have lost already guide our decisions lest that divert our attention to the task at hand, to forecast where we are headed from here.

Even if we are right about a stock coming back, if this does happen, we will know it and can get back in the position then. Laying low while things still look too grim to want to enter doesn’t just take on extra risk, it keeps us in positions that have turned bad by relying on rationalization rather than good judgement.

This brings us to the crux of the mistake made by these famous investors, which involves allowing the future to guide us too much by using the past and not the present as our reference point. This cannot ever be about Hertz getting back to $20 or more, as it is all about how far it might go up from $1 and whether this is, in itself, a good or bad proposition. We might enter a position with an expectation of long-term performance, and a stock may end up disappointing us, but this does not mean that it is time to go right now.

This mistake is a lot less of a big deal with regular investors, who can just click back in once they perceive their mistake. When you are dealing in not the thousands or even a few million but in the billions, trades of this size are very illiquid and you can’t just jump in and out like ordinary people can, and this isn’t even a good idea due to the slippage involved. If you’re going to buy back 39% of Hertz stock, you will pay a lot more than the best offer on the market, because these quotes only involve a small number of shares and there isn’t anything close to the amount you need on the book.

What needs to happen with these deals is that you need to tempt enough people to part with their shares, and to do that, you have to pay them considerably more than the market price for 1000 shares. This requires that any moves be made with a lot of thought as selling this number of shares will be painful enough and you really can’t pay this on the way back in as well.

If the outlook for the rest of the year is favorable, as was clearly the case with both airline stocks and even with Hertz, the fact that the stock isn’t to your liking in 2021 or beyond should not matter at all. If Hertz comes back just halfway, this would have meant that Icahn would have ended up a billion dollars more ahead, and a billion dollars is nothing to sneeze at, even if you are Carl Icahn.

Holding on may have been the easiest money that either man will ever make in their lives, and when you see a stock get hammered this much, losing 95% in just three months, with a company that is going to survive and come back to fight another day, this can see you achieve years of normal returns in a short period of time.

There was a strong smell of a bottom the very day that Buffett sold his airline stocks, and Icahn’s sale of Hertz also smacks of picking the bottom of this run perfectly as well. While Hertz’s bankruptcy proceedings will slow down the recovery of the stock, it still stands to benefit from the economic revival that we will continue to see as realize more and more that our fears of this outbreak have been overblown.

The way that stocks have fallen and risen again isn’t correlated with fundamentals, and stocks aren’t anyway, but they are strongly correlated to the emotions of fear and hope. We were afraid and we beat up stocks, and once we regained hope, the hope itself brought them back. These effects aren’t just persuasive, they are what drives the whole thing.

Both Warren Buffett and Carl Icahn will be fine when this is over, in spite of all the billions of dollars that they lost lately. They have done fabulously at this game, but with both in their 80’s now, with their glory days well passed, their recent actions stand in stark contrast and these are among the most unbecoming decisions that anyone could ever make, and especially with such legends.

It will be interesting to revisit these trades once the show is over and we get back to normal again, but these stocks being up substantially from where the men sold them, where they could have enjoyed returns much higher than they normally get by just sticking around and waiting for a better time to leave is as sure of a bet as you get with stocks, and their being right about this is as unlikely a scenario as you ever see as well.

We need to decide based upon probabilities, and ignoring the extreme probability of a stock going down and also ignoring the strong probability of it coming back at least somewhat is doubly bad, and involves an overall decision process that is about as bad as would ever be possible, messing things up to the maximum on both counts.

Mistakes are made to be learned from, and the horrible mess that Carl Icahn and Warren Buffett managed to create for themselves may provide some good lessons for much smaller investors who may have committed the same sins themselves, especially the one that had them hanging on while their stocks got looted.

We don’t want to miss the opportunity part either, and while the pain of something like this gets greatly amplified, there is sometimes an excessively pleasurable side to this as well, where you can earn money much more quickly than normal. Let others lose the money quickly, and stick to making money for yourself more quickly.

The ideal approach with Hertz would have been to run for your lives when you saw the market tank over the coronavirus, back when we told you it was time to get out of all stocks, and especially with those that have no immunity against a pandemic like the airline stocks and Hertz.

Selling for the $19 a share that Hertz was commanding back then, and buying the stock back at $1 would see you not only buying back these shares 19 times cheaper, it would see you owning 19 times more stock if you re-invested the money in the company. The stock just coming back to $5 would give you a 500% return instead of the 75% loss that doing nothing would involve, and the 100% loss that Carl Icahn has very likely locked himself into.

We cannot forget that the goal here is to look to make money, and hanging on to plunging stocks is no way to do it, and neither is dumping them at the bottom of the move. The hedge funds that profit from distressed stocks have already started to show up, and these are people who are experts at this sort of thing, and are about to make Carl Icahn not only look like an amateur but the worst of amateurs.

Hertz at $1 a share actually looks pretty good right now as far as distressed plays go, but just as Carl Icahn or Warren Buffet don’t bet the house on one play, this is a case where we don’t want to be putting too much of our money on this, and a case where diversification makes sense, spreading the risk around more than this. There actually is money to be made by fading legends though it seems.

Ken Stephens

Chief Editor,

Ken has a way of making even the most complex of ideas in finance simple enough to understand by all and looks to take every topic to a higher level.