Bill Ackman recently disclosed that his hedge fund had taken a position in car rental giant Hertz.
Amid the latest tariffs, he sees its potential to enhance utilization rates while lowering expenses.
While Ackman’s thesis makes sense, there are some notable risks associated with Hertz stock.
Certain personalities on Wall Street have the influence to create major moves in a stock with a simple comment or social media post. Billionaire hedge fund manager Bill Ackman is one of those people.
A couple of weeks ago, Ackman posted on X (previously known as Twitter) that his investment firm, Pershing Square Capital Management, had started building a position in car rental provider Hertz Global Holdings(NASDAQ: HTZ). Prior to Ackman’s announcement, Hertz stock was flat on the year. But in the wake of his social media post, the stock was up by roughly 71% year to date as of Monday morning.
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A meteoric rise like that might make you think you’ve missed your chance. But fear not! Ackman thinks Hertz shares could rise to $30 by 2029, which would be 380% higher than current levels. Here’s why.
Ackman often posts long-form essays on social media to explain the rationale behind a particular Pershing Square investment. When it comes to Hertz, he sees the current tariff situation as an under-recognized tailwind for the company. Let’s break down the math to better understand Ackman’s logic.
Hertz operates a fleet of roughly 500,000 vehicles with an estimated value of $12 billion. Assuming that President Donald Trump’s tariffs lead to an increase of 10% in used car prices, then Hertz’s fleet essentially would gain $1.2 billion in value. That would be more than half of the entire current market value of the company.
Some notable assumptions about the future are built into Ackman’s long-term forecast. At a high level, he is aligned with Hertz management’s guidance that it will be able to generate $1,500 in revenue per vehicle per month, while maintaining its depreciation per unit in the range of $300 per car per month. These metrics are only modestly better than what Hertz is achieving today — suggesting these targets are within reach.
If Trump’s tariffs do put some American consumers in a position where they have to rent cars periodically as opposed to buying vehicles, then theoretically, Hertz could be in a position to command higher prices on its rentals given improved utilization rates. Subsequently, the company could reinvest those extra profits back into the business and improve its fleet.
Ackman suggests that by 2029, Hertz could be generating $2 billion in annual adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA). By applying an EBITDA multiple of 7.5, Ackman derives a value of $15 billion for Hertz — equating to a share price of about $30.
Image Source: Getty Images.
One of the riskier aspects of investing in Hertz is how heavily shorted the stock is. Shorting a stock means that investors are putting money into bets that its price will go down. Short interest for Hertz stock has risen steadily over the last few years, and recently, roughly 50% of Hertz’s float was sold short. Generally speaking, short interest of 10% or more is considered an overly bearish signal.
Here’s the thing with stocks that are heavily shorted. From time to time, they rise rapidly. These price spikes tend to occur when investors with short positions need to cover them — buying shares so that they can close out those bets. If a significant number of investors do this in a short period, this can cause a short squeeze, putting intense, but usually brief, upward pressure on the price. A good example of this is what happened with GameStop back in 2021.
Short squeezes are incredibly unpredictable, and as a meme stock, Hertz has experienced them in the past. Now, layering on the fact that Ackman is an activist investor who has the ability and resources to influence management’s decisions, one or two better-than-expected quarters out of Hertz could inspire an epic, albeit fleeting, short squeeze — propelling the stock price notably higher.
Although Ackman’s investment in Hertz adds some legitimacy to the company’s perception, it remains to be seen whether or not Hertz can improve its value proposition. Moreover, it’s too early to know if tariffs will be a subtle catalyst for the company or not. Tariffs can be reversed quickly, so there’s no clarity about whether any higher demand or increased utilization that Hertz witnesses in the near term could last for the long term.
Given the high level of short interest in the stock and the number of unknowns about the direction of the company, I would pass on Hertz stock right now. While I do think its share price could rise exponentially, I think it’s more likely to do so because of short sellers covering their positions and less likely to do so based on any major progress across the business. For these reasons, I see Hertz as a risky stock to own.
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Adam Spatacco has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
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