A short squeeze is unfolding in Avis Budget (CAR.US) stock, characterized by a declining pool of shares available for trading alongside a sustained rise in its price. Following an announcement by Pentwater Capital Management regarding its acquisition of a substantial stake in the car rental firm, Avis Budget's share price has surged more than 150% over the past three weeks. The company's shareholder base already includes SRS Investment Management, a major holder with a significant position. According to financial analytics firm S3 Partners, this situation has made it increasingly difficult and expensive for short sellers to borrow shares.
Ihor Dusaniwsky, Managing Director at S3, stated that he is closely watching whether traders shorting the stock will maintain their positions or exit to cut losses. "This stock is getting squeezed," Dusaniwsky remarked. "It's like going to a NASCAR race; the crash is certainly spectacular." Data from S3 shows that as of Wednesday, bearish investors had shorted approximately 43% of the company's tradable shares, down from 49% in mid-March.
When a heavily shorted stock experiences a sharp price increase, some pessimistic investors are compelled to buy back shares to close their positions. This action, in turn, can create a feedback loop that drives the price even higher. Such "short squeezes" have been responsible for some of the most dramatic market movements in recent history. In 2008, a short squeeze in Volkswagen AG shares briefly made it the world's most valuable company. In 2021, retail investors propelled a massive spike in GameStop's stock price within days, inflicting heavy losses on hedge funds including Melvin Capital.
Pentwater, led by Matthew Halbower, disclosed in a regulatory filing last month that it had purchased millions of shares of Avis Budget and sold a significant volume of put options on the stock. The share price soared in the subsequent days. A separate filing this week showed that Pentwater's holdings totaled 22% as of the end of March.
Founded by Halbower in 2007, who previously served as a portfolio manager at Deephaven Capital Management and Citadel, the Florida-based firm engages in event-driven investing. Regulatory documents indicate it manages over $19 billion in regulatory assets, including leverage. SRS is a long-term supporter of Avis Budget, holding nearly half of the company's shares. Its founder, Karthik Sarma, has been a member of the Avis Budget board since 2020. He established the approximately $14 billion hedge fund after leaving Tiger Global Management in 2006.
Avis Budget is one of the world's largest car rental companies, operating more than 10,000 locations in approximately 180 countries. Recently, the rental car industry has benefited as travel disruptions at airports across the United States have prompted travelers to opt for long-distance road trips instead of flights. Since the beginning of March, shares of Hertz Global Holdings (HTZ.US) have surged about 37%, while Avis Budget's stock has more than doubled over the same period.
In a report this week, Deutsche Bank analyst Chris Woronka noted that Avis Budget's core business shows positive momentum but acknowledged that recent stock volatility is more likely driven by the short squeeze, which could continue to push the share price higher in the near term. Analyst forecasts suggest the company is on track to achieve a modest profit this year.
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