Avis Budget Group shares fell another 29% on Thursday after a 38% decline Wednesday, in potential sign that a short squeeze in the shares of the rental-car company could be ending -- or at least easing.
Avis shares fell 38%, or $270 a share, to $443.94 on Wednesday after trading at a record high of $847 just after the opening. Volume is heavy at more than 11 million shares. The stock is still up four-fold from just $100 a share on March 20. Option activity has also been heavy lately.
There doesn't appear to be any news driving the stock lower. Avis hasn't reported results for the first quarter. It said after the close of trading Wednesday that it will report those results on April 29 at 7 a.m. Eastern time.
The apparent spur to the squeeze was that two investors -- SRS Investment Management and Pentwater Capital Management -- effectively control over 100% of Avis shares. Both aren't expected to consider selling stock until after the company reports first-quarter earnings.
There are about 35 million Avis shares outstanding, valuing the company now at about $17 billion. Short interest was nine million shares on March 31, or more than 25% of the shares outstanding, according to Bloomberg. As Avis stock moved higher, it put more pressure on short sellers to cover their shorts, further boosting the stock.
Barron's wrote earlier Wednesday that it's hard to predict when the short squeeze might end, and that there appeared to be no catalyst for the squeeze to end. That assessment proved wrong. It simply may be that the elevated price of the stock spurred selling.
The company filed in late February to issue up to five million shares through a group of Wall Street sales agents at prevailing market prices. Such sales could be used to reduce debt. Barron's is unaware of any sales under that authorization, and the view on Wall Street has been that the company is unlikely to sell any of that stock until after its earnings release. Such sales would likely pressure the stock.
From a fundamental perspective, it was hard to justify anything close to peak stock price, and even with the pullback, the stock looks richly priced.
Avis now is valued at over 100 times projected 2026 earnings per share of about $4 a share. It's also valued at about 30 times estimated 2026 ebitda -- earnings before interest, taxes, depreciation and amortization -- of around $800 million. Historically, Avis has been valued at closer to 10 times ebitda. Avis has about $6 billion of corporate debt.
Rival Hertz Global Holdings, which has about 75% of Avis's revenues, is valued at $2.2 billion, or about 12% of the Avis market value. Hertz stock is up about 40% this year while Avis shares are still up 300%. Three companies -- Avis, Hertz and the private Enterprise -- control about 90% of the U.S. rental car market.
The Avis squeeze, which is being likened to historic squeezes in the past 20 years including Volkswagen in 2008 and GameStop in 2021, could attract regulatory attention because of the outsize ownership position of the two big Avis investors -- SRS Investment Management and Pentwater Capital Management.
The two investors -- SRS Investment Management and Pentwater Capital Management -- together own about 108% of Avis shares through stock ownership and cash-settled total return swaps. They own about 72% of the shares outstanding via stock ownership and the rest through swaps. The swap counterparties on Wall Street also could be buying Avis stock to adjust their hedge positions.
SRS Investment is headed by Jagdeep Pahwa, who is also Avis's executive chairman. SRS, the largest Avis holder with 17.4 million shares plus 2.9 million via swaps, probably can't sell until the company's earnings release given that Pahwa is an insider.
That's the view on Wall Street, including that of Deutsche Bank analyst Chris Woronka, who wrote about the squeeze in a client note on April 6.
Pentwater held 7.8 million shares, plus 10.2 million via swaps, as of March 25, according to the Avis proxy dated April 2. Florida-based Pentwater is led by Matthew Halbower. It is best known for its involvement in takeover arbitrage situations. Pentwater's potential sales of Avis stock may be restricted by the short-swing rule of the Securities Act of 1934.
This requires 10% holders of a company's stock like Pentwater to return any profits on stock held less than six months to the company. It appears that all but about three million shares of Pentwater's Avis stake has been held for less than six months.
Woronka's view of the rule is that may affect the entire holdings. "Based on our interpretation of that provision, it's unlikely that Pentwater sells any CAR stock before at least Sept. 30," he wrote in an April 6 client note.
Woronka and Barclays analyst Dan Levy both cut their ratings on Avis stock this month, calling the rally in shares a technical event tied to the apparent short squeeze.
"At its core, the move is a function of a sharp supply/demand mismatch in its stock, with two holders accounting for 71% of outright ownership of the company, and over 100% of economic interest given outstanding swaps on CAR stock. And with short interest now at nearly 100% of the float, yet with brokers accounting for much of the float due to the swaps (and likely the need to continue holding the stock to hedge against the swaps), a sharp short squeeze has been the result -- reminding many of the short squeezes faced by GameStop (2021) and VW (2008)," Levy wrote.
"All of this leads to uncertainty about how long this will last and whether CAR stock can go higher--we are unclear on this. However, we note that CAR could issue stock to capitalize on the run, which would provide crucial support in terms of deleveraging," Levy continued.
