Hertz is bankrupt. So why is everyone buying their stocks?

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Investors are cramming in the stocks of bankrupt companies, betting against a legal process that regularly wipes out shareholders.

Car rental company Hertz Global Holdings Inc., oil driller Whiting Petroleum Corp. and retailer JC Penney Co. are among the companies that have seen their shares more than double in recent trading days despite their Chapter 11 bankruptcy, a process that keeps companies operating. while developing a creditors repayment plan.

“I’ve always thought that people have a psychological urge to buy stocks at a low price,” said Kirk Ruddy, a former bankruptcy claims trader. Retail investors can buy big names they recognize without realizing how rare it is for shareholders to get anything back in the event of bankruptcy, he said.

“If you look at the markets in general, people don’t know where to put their money. They’re like, “Hey, I’m going to try this $ 1 stock,” said Ruddy, who now works in sales for SC Lowy Financial HK Ltd.

On Tuesday, JC Penney shareholders will pressure a federal judge to appoint a court-approved committee to represent them in the bankruptcy case. Getting official status would mean forcing the retailer to pay lawyers and financial advisers who would work on behalf of shareholders. Judges rarely allow such requests for two reasons: legal fees can be high and under the so-called top priority rule all a company’s debt must be paid before shareholders can collect anything. .

Part of the rally in stocks of insolvent companies could be attributed to short hedging, when traders who bet against a company close their positions by buying back stocks, thus raising prices. But the rally could also be fueled by amateur traders, bored with foreclosure and looking for a quick buck, using platforms like Robinhood. The number of Robinhood users holding both Hertz and Whiting Petroleum shares increased after the companies filed for bankruptcy, according to Robintrack, a website not affiliated with the stock trading platform that uses data to show trends.

“No one ever loses equity in a bankruptcy case,” US bankruptcy judge David Jones said at a JC Penney status conference last month. “Equity is lost long before a case is filed.”

Under US bankruptcy law, shareholders are the last in line for any type of payment – behind lawyers, lenders and sellers – making an unusual share recovery. The size and scope of payments are usually determined by a so-called Chapter 11 plan, which creditors vote on and send to a federal judge for approval. These plans often leave even high-ranking creditors to get less than what they are owed.

Price gains among insolvents include:

  • Hertz, which has climbed 95% since filing for bankruptcy on May 22
  • JC Penney, up 167% since May 15
  • Whiting Petroleum, up 835% since April 1
  • Pier 1 Imports Inc., which has more than doubled in the last two trading days, although it is still down 97% since filing for bankruptcy on February 17

Companies that started preparing for bankruptcy also saw their shares rise on Monday, including:

  • Chesapeake Energy Corp. jumped 181%
  • GNC Holdings Inc. grew 106%

Representatives for Chesapeake, Hertz and Whiting did not respond to a request for comment. GNC and JC Penney declined to comment.

Meanwhile, corporate-linked debt securities continue to trade below par, implying expectations of a less than full recovery for creditors who rank well ahead of shareholders.

Whiting Petroleum has a plan on file that provides for payment to current shareholders in the form of new shares. But like most bankruptcies, the plan is subject to court approval and could be challenged by senior creditors.

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