Written by: Gary Ashton
The US Securities and Exchange Commission (SEC) put a stop to the $500 million stock sale of Hertz (NYSE: HTZ) after indicating there were problems with the company’s stock prospectus disclosures. Hertz filed for bankruptcy protection on 23 May 2020, collapsing under the weight of the global Coronavirus pandemic that has devastated the global travel industry. Hertz decided to launch the stock sale after getting approval from a US bankruptcy court overseeing the case. The court agreed that an equity injection was the best way to raise funds needed during the financial restructuring.
Interest in Hertz’s stock has increased since the bankruptcy filing, especially among retail investors, such as day-traders and penny-stock investors. The participation of retail investors is precisely why the SEC is taking a closer look at Hertz’s risk disclosures in its prospectus. Institutional investors, such as hedge funds, are better able to manage such risks, but less sophisticated retail investors require more regulatory protection. For now, the SEC believes Hertz has not done enough to warn investors that the stock they would be buying is virtually worthless and has put a stop to the stock sale.
Hertz did say that senior creditors would need to be repaid in full for the stock to have value, a prospect that looks unlikely in the current business environment. Still, the SEC has other comments on Hertz’s risk disclosures that the company needs to resolve. If the company can satisfy the US regulator, then the stock sale might still happen. The bankruptcy court has already approved the deal, and management knows it is their last best hope to raise funds needed to restructure the company and avoid liquidating assets to pay senior creditors.
Other Penny Stocks to Trade
Since the Coronavirus pandemic, Hertz has become a penny stock. Finscreener.com defines penny stocks as stock prices under $5 per share and market capitalization under $2 billion. Hertz closed last week at $1.73 per share and has a market cap of $246 million. Finscreener.com recently launched a new Penny Stock Screener that allows subscribers to search and screen for ultra-small cap stocks that can sometimes present outsized trading opportunities. Such stocks carry higher risk, as the case with Hertz discussed above demonstrates, but penny stocks can also be profitable if traders can spot a possibility the market does not see. Some believe spotting such profit opportunities is easier with penny stocks because fewer people watch, analyze, or trade them.
Skilled analysts can do very well trading penny stocks. Finscreener’s Penny Stock Screener shows the top 20 micro-cap names ranked by 3-month performance trading on US exchanges (mostly NASDAQ) returned more than 200% over that period. The bottom 20 micro-cap stocks listed by 3-month performance lost more than 25%, with Hertz among the worst performers, down 66.34% in the last three months. Penny stocks are not for everyone, but profitable opportunities are possible.
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