Bankruptcy: The newest fad?

Right now, we can definitely say that it’s uhhh “interesting” times for the stock market. Things are starting to look a bit backwards in the markets, gone are the times where sound investments are made based on solid balance sheets and financials, and in are the days of extreme volatility and unpredictability. Ok ok, that was a pretty big exaggeration, but it’s crazy how we’re seeing bankrupt companies experience sudden surges in their stocks. One example being Hertz, we did an article not too long back about Hertz going bankrupt and what that could mean for their future, and since then, stocks have soared for the stars. Hertz took off, calmed down (when the market went red this week), and then continued jumping. What is going on? This company has no reason to be taking off like this. 

At this point, the stock market has turned into almost a casino. However, there could be a bit of an explanation for why the share price of companies like Hertz surged after declaring bankruptcy. There are individuals known as “vulture investors”, which are people who essentially buy stock that has dipped, pump the stock up, and then sell their position. That could be one contributor. Another is the rise of amateur traders. Trading platforms like Robinhood have determined that they’re seeing more and more new traders create accounts on their platform. There’s nothing wrong with that, but when you look at the data, we can see

that during Hertz’s drop after declaring bankruptcy, trading activity for the equity grew exponentially (as shown by the graph, courtesy of CNBC). Now, that’s a problem. Reasonably speaking, I wouldn't have expected so many investors to put their money into a company that has openly come out and say they're struggling. Other than the potential for a reopening, there really was no other positive news going for the car rental company, and yet people continued to add it into their portfolio. Again, this ties back to the idea that parts of the market have turned into essentially gambling platforms. Much of these worthless stocks are being bought by investors who assume that someone else will eventually come by and scoop them up for a higher price. 

It’s clear that bankrupt company shares have been running on speculation, but one can also make the connection that so has the stock market in a way. With momentous fiscal stimulus being provided by the Fed and the gradual reopening of the economy, investors have been a bit too trigger happy and the result being that markets hit an all-time high this week. I mean, we got the news a couple weeks back that Carl Icahn had completely dumped his holdings, so what evidence left could possibly lead shareholders to think that a company like Hertz has a chance of bouncing back to its original price? However, there is a chance that share prices could go back up, at this point nothing is impossible in the markets. Invest at your own discretion. I’m not endorsing that you buy any shares of a bankrupt company with no future foundation, but I’m also not in control of your money. Just don’t be too upset when the debt collectors get their share from the company and none of it is left for the ones holding the bag. 

Any thoughts? Feel free to comment below

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