Here’s Matt Levin explaining the Avis stock short squeeze, or why Avis is up 300% in a month.
[T]wo hedge funds, between them, own 69.3% of the stock[4]..But SRS and Pentwater also have other bets on Avis’s stock. Specifically, they both own cash-settled total return swaps on the stock.. So, economically, SRS and Pentwater between them own 106.21% of Avis’s stock outstanding. Huh! Actually the number is a bit higher…
It is unusual for the two biggest shareholders of a public company to own 108% of its stock. 108% is, for instance, more than 100%….They’re not the only holders! Avis is in various stock indexes, and there are various normal index-fund holders… How do people end up owning more than 119% of a company’s stock? Well, short sellers…
To short the stock, you had to borrow it, probably from your bank or broker, who borrowed it from someone who owns it. Stock borrow is usually “open term,” meaning that the owner can demand that you return it any time. Who owns the stock that you borrowed? I mean, probably BlackRock or Vanguard or State Street or a retail investor with a margin account.
But if the two big Avis shareholders own 108% of the stock, in some loose probabilistic sense they own the shares you borrowed. If they converted their 108% partly-synthetic position into all stock, and stopped lending it out, you would have to buy back stock to return to them. Who would you buy it from? Well, they own 108% of the stock. You’d buy it from them.
How much would you have to pay them? Well, whatever they wanted to charge.
Car rentals are a brutal business. They’re capital-intensive. They have high operating costs. It’s a big risk that relies on high fleet utilization. Most costs are fixed in the short run, but nearly all of their revenue is variable and at-risk. It’s why so many car rental operations are so shady.
Avis is among the better outfits. The saying “you don’t need to outrun the bear, you just need to outrun your friends.” They’re literally competing against Hertz, Payless and Fox. But that’s not why their stock has gone up so much!
Why am I thinking of “The Producers”, where they sold far more than 100% of a sure-to-fail show? (Spoiler alert: It didn’t.) Mel Brooks claimed he got the idea from a Broadway producer who actually got away with it.
I’m surprised Avis didn’t do what Allbirds (struggling shoe company) just did… pretend they’re an AI company, juice their stock 700%, pump n’ dump. The market is irrational at the moment. Casino.
@drricard — Love that film. And, when they get caught, they’ll have to produce a new musical: “Prisoners of Love.”