KeyStone’s Your Stock Our Take: Nikola Corp. (NKLA:NASDAQ) and Hertz Global Holdings, Inc. (HTZ:NYSE)
This week in KeyStone’s Stock Talk Podcast, we start by discussing the idea that the market may be headed for a ‘lost decade’. The idea, while not new, was brought front of mind this week in a note from Bridgewater, the largest hedge fund manager in the world. We also circle back on last weeks thoughts about the surge in Day Trading activity as the author of the book “A Random Walk Down Wall Street”, which cited the same study we noted in our episode last week as evidence day trading is not a smart idea for the average investor.
In our Your Stock, Our Take segment we take a look at a couple of highly published names from the past several weeks.
The first, Nikola Corp. (NKLA:NASDAQ), the would be designer and manufacturer of electric and fuel cell vehicles including semis and trucks, with no sales that recently IPO’d on the market and holds an astonishing $24 Billion current market cap.
The second is the embattled and debt-heavy Hertz Global Holdings, Inc. (HTZ:NYSE) which saw it stock crater over this year, but somehow bounce when it filed for bankruptcy. It appears the rout in the stock is back on – we let you know if there is any hope.
Headline: “The stock market could be on the verge of a ‘lost decade,’ Ray Dalio’s Bridgewater warns”
Bridgewater, the largest hedge fund manager in the world at $160 billion – Ray Dailio is the founder.
First-off, Ray has a vested interest in stating the broader stock market may have poor returns as his hedge fund is considered an “alternative investment” to the general stock market. If the general stock market is set to do poorly in terms of total return for a decade, then investors can seek alternatives.
Secondly, the statement makes for a great headline and gets his firm press.
But is it valid?
Let’s quickly look into why Dailio believes we are in for a lost decade. I quote, “Globalization, perhaps the largest driver of developed world profitability over the past few decades, has already peaked….Now the U.S.-China conflict and global pandemic are further accelerating moves by multinationals to reshore and duplicate supply chains, with a focus on reliability as opposed to just cost optimization.”
Bridgewater’s note pointed to developments from two companies, Intel and Taiwan Semiconductor, to back up their thinking on globalization. Both firms have recently said they intend to build their next production facilities in the US despite the higher costs.
In theory, this could lead to lower margins, so it makes sense to a degree.
“Even if overall profits recover, some companies will die or their shares will devalue along the way,” the analysts said, according to Bloomberg. “Left with lower levels of profits and cash shortfalls, companies are likely to come out on the other side of the coronavirus more indebted.”
I agree, some companies will die – we may touch on one today. On the flipside, in a changing environment, other companies will prosper. If supply chains are brought closer to home, as the article suggests, there will be businesses that gain from supporting this shift.
It is a “market of stocks”, not a stock market. In boom and bust times, there are always companies that outperform. To suggest investing in stocks will be completely fruitless for a decade, is silly.
We always have a choice where to allocate our capital – there is no reason to do exactly what most big bank advisors have been telling Canadian and US investors to do for decades – essentially “buy the market”.
We just gave 6 full seminars on this topic – create your own 15-25 stock portfolio consisting of strong businesses. Stop buying “the stock market”. Lost decade or not, you can still outperform by owning the right businesses.
Circling Back to Our Topic from Last Week – Day Traders – Author of Random Walk Down Wall Street Quoted the same study as me.
‘Don’t confuse day traders with serious investors’: Warren Buffett and Howard Marks will win over time, Princeton economist says
Burton Malkiel, the Princeton economist and author of “A Random Walk Down Wall Street”, and now Robadvisor, Wealthfront’s investment chief, warned this past week that the shutdown surrounding the coronavirus pandemic has sparked “full-blown mania” in financial markets.
Malkiel pointed to two recent examples of “frenzied buying” by day traders on Robinhood:
Driving the stock price of FANGDD, a Chinese online real-estate group, up more than 2,000%, likely because it has a similar name to the FAANG group of stocks.
Helping to more than double Hertz’s stock price after the car-rental agency filed for bankruptcy, perhaps because they weren’t aware that shareholders are almost always wiped out in the bankruptcy process.
The economist and author added that almost all individual traders suffer losses over time, highlighting three studies to support his claim:
- Active traders on Charles Schwab significantly underperformed a low-cost index fund over a six-year period.
- Less than 1% of Taiwanese traders consistently beat a low-cost ETF over a 15-year period, and 80% lost money.
- 97% of Brazilian day traders lost money, and just 1% earned more than the national minimum wage.
The last study was the exact one we highlighted last week. We agree, the surge in day-trading is not likely to end well for the average investor. Through the last couple a boom/bust cycles we have managed KeyStone through, there as been surges in day-trades near peaks.
Where we strongly disagree with Malkiel is on the notion that it is pointless to pick individual stocks. Done poorly it is certainly ineffective, but done well over the long-term as evidenced by Warren Buffet or Peter Lynch, it can be a great way to grow wealth.
Your Stock Our Take
Nikola Corp. (NKLA:NASDAQ)
Current Price: $65.92
Market Cap: $23.9 Billion
What does the company do?
Nikola Motor Company designs and manufactures electric components, fuel cells, drivetrains and vehicles.
Its current products include: semis, a pickup truck and powersport vehicles.
Stock Performance:
The stock was up over 500% in the last three months after VectoIQ Acquisition corp., a special purpose acquisition company led by former GM executives approved the pending acquisition of hydrogen-powered electric truck start-up Nikola Corp. for $3.3 billion. The company which was previously listed under the symbol VTIQ began trading on the Nasdaq under its new ticker NKLA on June 4th.
What is driving the stock?
This is the common case of a stock getting bid up based largely on the speculation that the company will be able to take advantage of a large, relatively untapped, environmentally friendly market. And will be able to execute successfully while doing so.
Financial Results (Q1 2020)
There really isn’t much that we can dig into as the company doesn’t generate any money from vehicle sales at the moment and Nikola only expects to generate revenue by 2021 with the roll-out of its battery-electric (BEV) truck, followed by fuel-cell electric (FCEV) truck sales starting in 2023 and the initial build out of hydrogen fueling stations to serve Nikola customers’ fleets, such as Anheuser-Busch. The company states that it has more than 14,000 pre-orders representing more than $10 billion in potential revenue over two and a half years of production.
It’s important to understand that these pre-order deposits can be as low as $250 (This is referring to their pickup truck), and also, along with the deposit, they are providing customers tickets into a raffle which will allow one lucky individual to win his/her truck. I wasn’t able however to find out if these deposits were refundable or not.
Our Take:
Nikola is what I would like to refer to as a speculative company and something we would tell our clients to remain cautious on. Our first criteria for determining if a company is investment quality is whether they are profitable, and at present there is just no way of accurately valuing the business based on its fundamentals.
Considering Nikola is years away from generating consistent profit, or even revenue, along with the fierce competition they will face from more established firms like Tesla, Ford and Toyota, we would remain on the sidelines with Nikola Corp.
Your Stock Our Take
I’ve been reading about Hertz and some of the strange price movements on the stock since it declared bankruptcy. I’m curious to know why investors would still be buying the company a stock that is going out of business. – Megan from Edmonton.
———————————
Hertz Global Holdings Inc (HTZ:NYSE)
Current Price: $1.50
Market Cap: $212 million
What does the company do?
Hertz Global Holdings is an automotive vehicle rental service and operates under the brands Hertz, Dollar, Thrifty, and Firefly. Hertz is one of the largest and most recognizable vehicle rental brands globally.
Key Points:
Hertz has been in media headlines recently as somewhat of a peculiarity. The company announced on May 22nd that it had filed for bankruptcy and attributed this action to the economic downturn caused by the covid-19 crisis. Clearly, as a vehicle rental company, the business is highly dependent on travel which ground to a standstill after the global economy shutdown in March.
The financial pressure on a company like Hertz was not a surprise. The surprise was the unusual price movements seen afterwards. Immediately after the announcement, the stock price dropped from almost $3.00 to about $0.55 per share. But in the days afterwards, the volume skyrocketed and the price increased 10-fold to over $5.50 per share. Since then it has settled back down to the $1.50 range.
Recent Financial Performance
Looking at Hertz’s financial performance and debt leverage, it isn’t hard to see that the company was already on the path to bankruptcy well before the pressures from covid-19 started.
Hertz reported 2 consecutive years of net losses in 2019 and 2018 and 3 years of net losses over the last 5 years. This poor performance also has to be viewed in the context of these years begin a fairly robust period for travel.
The company has produced decent performance over this period with respect to growth in revenue and operating income. What has been killing profitability on the bottom line is high levels of debt and interest payments. For example, the company’s operating earnings, which is before non-operating expenses, was $760 million in 2019, and the interest expense on debt for the year was over $800 million.
Total debt as of the end of the last quarter (Q1 2020) was over $20 billion compared to shareholders equity of only $1.3 billion. That’s a colossal debt to equity ratio of over 15 times.
Our Take:
Hertz is not an investible company. Its clear to us that the company was well on its way to bankruptcy long before the pandemic started. Hertz was able to maintain profitability even in a normalized environment and was loading itself up with debt.
The company’s stock price was already performing poorly in the year leading up to the pandemic and it has pretty much been in more or less of a consistent decline over the past 5 years.
Why are people still buying it? Clearly a lot of this is just trading. Traders like to see high volatility and may be playing the stock on that basis. But trading is more akin to gambling which is not investing.
Another potential reason flying around is that retail investors think that the negative news means that they can somehow get a deal by buying shares in Hertz at a depressed share price. There is a strategy that professionals and hedge funds often implement whereby they find opportunity to invest in distressed and bankrupt companies. However, this is something that requires a huge amount of specialized skill to do well and is not suitable for the vast majority of investors.
Some investors may think that because the stock is trading at a massive discount to shareholder’s equity that it is a value stock. We would warn against this mentality. Shareholders equity is based on the accounting value of asset on the balance sheet which may have little to no relationship to the actual market value of those assets. So, while the accounting shareholders equity may be $1.3 billion, the real shareholder’s equity may (and in our opinion like is) well below zero.
KeyStone’s strategy has always been to focus on quality companies that are growing. Hertz is far from meeting that criteria.
