CNBC’s Jim Cramer warned new buyers Tuesday concerning the critical danger of buying the stock of corporations that filed for chapter similar to Hertz.
“You may think a stock like Hertz or Chesapeake looks like a steal at these levels, but the only people being robbed here are you the buyers,” the “Mad Money” host stated, referencing Chesapeake Energy amid stories it is making ready its personal submitting.
Shares of automobile rental firm Hertz ended Tuesday’s session at $4.18 after falling 24%. But the stock had surged Monday and continues to commerce increased than when it filed for Chapter 11 reorganization in late May, Cramer famous.
Cramer stated it is “highly unlikely” that Hertz, as a enterprise, goes away in its chapter. But the corporate’s bondholders would be the first in line to get a chunk of the post-bankruptcy Hertz. Owners of the widespread stock, however, “are at the bottom of the bankruptcy pecking order,” Cramer stated.
“If you Hertz here at $4, you’re buying the old Hertz with $19 billion in debt that it can’t repay,” Cramer defined. “Since the creditors can’t collect, they’re going to seize the collateral, which is the business. So this $4 stock will most likely just be cancelled.”
That is a actuality well-known by folks like legendary activist investor Carl Icahn, Cramer stated. Icahn held a virtually 39% stake in Hertz but dumped it final month after the corporate filed for chapter.
“Believe me, if there was a real chance the common stock would be worth anything, Icahn would’ve stuck around. He didn’t,” Cramer stated.
Cramer additionally stated if he have been working the chapter court docket, he would forestall shares of Hertz from being traded, serving to “keep inexperienced investors from losing money on it.”
“Instead this darn thing traded 530 million shares yesterday and 295 million today,” Cramer stated. “The whole float is only 140 million. That’s insane.”
Cramer, a former hedge fund supervisor, stated he has private expertise about buying shares which have a danger of being worn out. He recalled years in the past buying stock in a reorganized firm, Memorex-Telex, in hopes it had emerged from chapter proceedings stronger than earlier than.
“But it didn’t. It filed for bankruptcy again. We lost the whole investment,” Cramer stated. “Taught me a valuable lesson: it doesn’t matter how little you pay for a stock, when it goes to zero, you lose everything. At least it stopped at zero.”