There’s been a lot of market madness going on recently. Euphoric day-traders have been piling into volatile and beaten-down stocks, hoping to make a quick buck. But serious investors should hunt out bargains in the FTSE 100.
Everybody Hertz
One of the most bizarre trades I’ve seen in 34 years as an investor is happening in America. Day-traders – fuelled by commission-free trading – have piled into the stock of car-rental firm Hertz.
In the past two weeks, Hertz stock has been on a roller-coaster ride, plunging as low as $0.56 and soaring as high as $5.53. At the current price of $1.40, Hertz’s equity is worth just $200m. That’s a tiny valuation for a market leader in any field, especially for a household name that has been renting out cars since 1918.
Why the boom, when Hertz is bust?
There’s one problem with this trading frenzy: Hertz filed for bankruptcy protection in a US court on 22 May. This buys the company time to negotiate with its creditors and restructure nearly $19bn of debt.
I suspect that Hertz’s stock volatility has been driven by frenzied day-traders and algorithmic trading. But one thing is clear: with Hertz bankrupt and its corporate bonds trading at large discounts to par values, the stock is worthless.
In US corporate history, hundreds of major companies have gone bankrupt, later to emerge phoenix-like with reduced debt burdens. But when lenders and bondholders take haircuts or swap debt for equity, shareholders get completely wiped out. That’s kind of how bankruptcy works.
This FTSE 100 firm should prosper post- pandemic
Although Hertz was the #1 name in car rentals, this didn’t prevent it from going bust. When highly leveraged companies try and fail to raise fresh capital from shareholders, bondholders and lenders, then bankruptcy is often inevitable.
Which brings me to the UK market. A number of FTSE 100 businesses hit equally hard by coronavirus have successfully raised capital from their shareholders. Take FTSE 100 firm Whitbread (LSE: WTB), owner of the hugely popular Premier Inn budget-hotel chain.
Following the sale of its Costa coffee chain for £3.9bn in 2018, Whitbread became financially stronger than many rivals. Even so, when faced with a crisis, investment bankers tell clients to ‘go early and go big’ when raising capital.
Whitbread did just that, raising £1bn to shore up its balance sheet (and buy distressed assets from weakened rivals). The firm also has access to £2.4bn of undrawn credit lines, giving it the financial firepower to survive and thrive after Covid-19.
With Whitbread’s revenues down 99% during this crisis, we can’t value this FTSE 100 share using fundamentals such as earnings per share and dividend yield. However, when life returns to normal (or some form of post-Covid normality), resilient and well-managed companies will bounce back. FTSE 100 stalwart Whitbread will be there, ready to gain market share and take a bigger slice of consumer spending.
As for Whitbread’s shares, they have ranged widely in 2019/20. Over the 12 months, they traded as high as 4,462p (on 16 December 2019). During the depths of the market crash, they plunged to just 1,551p on 19 March – a ‘once in a lifetime’ FTSE 100 buying opportunity?
At Monday’s closing price of 2,354p, Whitbread shares languish at nearly half (53%) their 2020 high. That 47% discount is too high for a £4.8bn FTSE 100 survivor. I’d buy at this price.