Avis Budget Group (CAR) went from unlikely meme stock to 8-car pile up. And traders likely had no insurance. This is a table I don’t often feel any urgency to use. But when a stock of a business and brand so many people recognize peaks intraday on a Wednesday at $848 a share and closes the following Monday at $187, the logical reaction would be this:
WTF: Why the Fall?
And more specifically, why did this boring rental agency stock suddenly go all GameStop (GME) on us? To the uninitiated, this is what can happen when a short squeeze meets deteriorating fundamentals. But this time, no kitties were roaring.
The case against Avis is built on a series of structural potholes that have emerged over the last year. The company’s pivot to electric vehicles has proven to be a costly miscalculation. In its most recent full-year report, Avis was forced to take a $518 million impairment charge on its EV fleet. The plummeting resale value of used electric cars has injured the company’s ability to manage its most important asset: the fleet’s residual value. For the upcoming Q1 report, analysts are projecting a massive loss, versus the profitability seen during the post-pandemic travel boom. This is in part due to the so-called “jobless expansion.” That’s where the economy grows but employment remains stagnant because people fear quitting and not finding another position. Add persistent inflation and the leisure traveler is finally failing to lift companies like CAR.
That, and reports of a potential equity offering spooked investors. Well, that’s likely off the table, now that the stock has done a nosedive so quickly. Talk about a terrible consolation prize for shareholders. Good news: no diluted share offering. Bad news: a “market-induced” split, to the tune of about 1:4. As in for every four dollars you had invested in CAR early last week, you now have a single dollar.
The CAR story is among other things a great lesson to those newer investors who have been trained in a Pavlovian manner to buy aggressively when they hear about a “short squeeze.” What starts out as a pile-on scenario quickly becomes a game of chicken. As if that were not enough, earnings are before the market opens this Wednesday!
Before I show the chart of CAR, please take any children out of the room. I’ll wait… OK, here it is.
I am hard-pressed to find a better example of how my ROAR Score, while far from perfect, does its No. 1 job much more often than not. I’ve marked on this chart below where the score moved from the yellow (neutral) risk zone to a higher risk (red) status.
That was not at the top, since it’s all relative when a stock moves a year’s worth every day (see first table above). But it was more than $600 a share, up from $148 three months earlier.
As they say, bulls make money, bears make money. But pigs? They get slaughtered. Even in seemingly unsuspecting businesses like auto car rental. As for an “action plan,” the best for my money is to stay clear of traffic. Unless you want to consider a trade here as akin to buying a lottery ticket.
Rob Isbitts created the ROAR Score, based on his 40+ years of technical analysis experience. ROAR helps DIY investors manage risk and create their own portfolios. For Rob’s written research, check out ETFYourself.com.
On the date of publication, Rob Isbitts did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
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