Avis Budget Group stock has rallied as much as 700% in the last four weeks, surging 18% when markets opened on Wednesday to an all-time high of $847 before tanking 48% from its peak by market close.
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The car rental company’s stock hit a record high Wednesday, despite the business reporting billion-dollar net losses in the last two years as demand for used cars declined and expensive business decisions—like expanding its fleet of electric vehicles—ate away at profits.
The stock surge could in part be due to increasing travel demand since January as noted by Deutsche Bank, with some travelers—especially spring breakers—opting to drive to avoid flight delays and complications due to airport staffing shortages during a partial government shutdown in February and March.
But the extreme rally this month is mainly due to investors who had previously bet that the company would not do well by using a method called shorting—when an investor borrows shares of the stock from someone and immediately sells it to someone else, with the intent of buying those shares back when the stock price goes down so they can pocket the difference when paying back the original owner of the shares.
A series of SEC filings in March and April showed two hedge funds SRS Investment Management and Pentwater Capital owned 71% of shares, with Pentwater in particular aggressively increasing its stake to 22% from around 8% last year.
Pentwater removing so many shares from the public market by increasing its stake triggered short sellers to aggressively buy back their borrowed shares to prevent having to pay back the original owner of the shares at a higher price, with the artificial demand increasing the price of the stock and the increasing stock price creating even more demand from short sellers to prevent losses.
Out of all publicly available shares of Avis, around 86% of them were shorted as of this week—at similar levels as an all-time high of 89% in March, according to data analytics firm Ortex.
Avis stock surged as much as 18% when markets opened Wednesday to an all-time high but erased those gains and dipped an additional 38%—showing signs the surge may be crashing.
Investors have been taking notice of the “meme stock”-like behavior of Avis’ stock, with the stock price skyrocketing with no significant changes to the underlying business. But the dynamic differs from the infamous stock rallies in 2021 of companies like GameStop and AMC, known as meme stocks because thousands of retail investors purchased shares to counter short positions of large institutional hedge funds by coordinating on Reddit. While these meme stocks were also a product of “short squeezes”—when the rising prices of heavily-shorted stocks forces short sellers to buy back their borrowed shares—Avis’ current squeeze is not primarily driven by thousands of retail investors riding social media hype. Instead, SEC filings from early April show two hedge funds SRS Investment Management and Pentwater Capital built a combined 71% stake in Avis—SRS methodically over more than a decade, Pentwater rapidly in recent months—creating a limited supply situation. Retail traders have piled in as the rally has accelerated, but they are not driving the shortage of supply, according to Vanda Research. Avis was also a retail investor-fueled meme stock back in 2021, when the company reported stronger-than-expected earnings and announced it would be leaning into electric vehicles, and retail traders on Reddit latched onto it immediately and pumped up the stock. In November 2021, shares peaked as high as $545 before the stock crashed after most short sellers had gotten out of the situation by buying back their shares—even if at a higher price—and retail interest from social media faded.
$5 billion. That’s around how much short sellers have lost from the Avis short squeeze, according to data analytics company S3 Partners.
SRS is run by billionaire Karthik Sarma, who Forbes estimates has around a $2.9 billion fortune. Avis is SRS’ largest position, representing around 30% of the firm’s publicly disclosed portfolio. In 2021, when Avis’ stock surged in a meme stock frenzy, Sarma became a billionaire on paper, personally making him $2 billion that year. Despite Sarma losing his gains after the stock tanked, SRS has increased its position in the company from around 30% in 2021 to nearly 50% today.
Avis is reporting its first quarter earnings in May. Investors will be watching for whether the company’s historically-high costs have pared and whether rental pricing and volume actually held up through the TSA-driven travel disruption. Another key topic will be whether management moves ahead with the previously approved sale of 5 million shares to the public market—which they had set up before the squeeze as a way to raise additional capital to offset the business’ mounting debt—as the decision would almost certainly end the short squeeze overnight.
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