Why I'm still saying to 'sit tight'; Bill Ackman has a new position in Hertz Global

1) The main reason I've still been saying to "sit tight" amid all the recent market turmoil is that I worry that the Trump administration's tariff plans have put us into uncharted economic waters.

Businesses large and small are constantly making critical decisions about investments, sourcing, pricing, and so forth. And right now, most are uncertain at best... and paralyzed at worst.

The latest evidence for this is the Empire State Manufacturing Survey, which the Federal Reserve Bank of New York released last week based on data collected from April 2 to April 9 in the immediate aftermath of "Liberation Day" (you can read the entire report here).

While the report only captures manufacturers in New York state, the findings are consistent with what I'm seeing and hearing across Corporate America...

The 11 current indicators are stable (other than sharp increases in "Prices Paid" and "Prices Received"). But the forward-looking indicators – based on expectations for the next six months – are alarming.

Here are the first four forward-looking indicators from the report – look at the sharp declines in the past few months:

 As the New York Fed summarizes:

Firms expect conditions to worsen in the months ahead, a level of pessimism that has only occurred a handful of times in the history of the survey.

Of course, pessimism and uncertainty are usually the friend of the long-term stock market investor because they can create mispriced bargains.

But as I look at dozens of stocks (many of which I've discussed in recent e-mails), I'm finding that since they started at such high valuations – recall that the market was at an all-time high only two months ago – they're not as cheap as I would want to see today... especially in light of the economic and tariff uncertainties.

So with my top-down and bottom-up analyses flashing "red" and "yellow," respectively, I'll repeat what I said last week...

My "spidey sense" isn't telling me to either buy or sell across the board, so I continue to believe that sitting tight remains the best course.

2) Car-rental giant Hertz Global (HTZ) caught my eye last week when its shares rose a staggering 126% in two trading days last week after my college buddy Bill Ackman of Pershing Square Capital Management disclosed a stake of just less than 20% of the company.

On Thursday afternoon, Bill shared his investment thesis in a long post on social platform X. Excerpt:

We believe that a combination of: (1) an improving industry structure and more rational competitive behavior, (2) the near resolution of the company's over exposure to Teslas, (3) a successful operational turnaround plan under a new management team with a track record of success in an adjacent industry, and (4) the company's leveraged capital structure will enable Hertz shareholders to generate a highly attractive return on investment.

Bill also thinks Hertz could benefit from tariffs on new cars leading to an increase in prices for used cars:

Hertz is uniquely well-positioned in the current tariff environment, where auto tariffs are likely to cause used car prices to rise. Hertz owns a fleet of over 500,000 vehicles valued at approximately $12 billion. A 10% increase in used car prices would equate to a $1.2 billion gain on its auto assets – equivalent to approximately half of the company's current market capitalization.

He concludes by laying out a scenario in which the stock could be worth $30 per share (it closed Thursday at $8.24):

Using management's nearer term targets of $1,500 revenue per unit (RPU), low $30s/day vehicle operating expenses, and ~$300 depreciation per unit (DPU), and assuming modest increases by 2029, including an increase in fleet utilization from 80% to 85%, we estimate that Hertz could generate approximately $2 billion of Adjusted EBITDA (a metric which is net of auto depreciation and interest expense for the company's fleet and asset-backed financing).

At 7.5 times EBITDA, a valuation that we believe to be conservative in light of improvements in the competitive posture of the industry, we estimate that Hertz will be worth ~$30 per share by 2029.

Since Hertz emerged from bankruptcy in 2021, its stock (until last week) had been a bust:

When we take a look at Hertz's financials, we'll see why...

Revenue and net income plunged during the pandemic, but then recovered strongly in 2021 and 2022 before profits once again plunged last year:

Free cash flow ("FCF") surged as the company sold down its fleet in 2020 to try to stave off bankruptcy. But otherwise, it has been consistently negative. Take a look at this chart of operating cash flow, capital expenditures ("capex"), and FCF:

And while Hertz was able to reduce its debt during bankruptcy, since then it's back to almost $18 billion:

Hertz's financials are ugly. There's a decent chance that the company becomes a "Chapter 22" – in other words, filing for Chapter 11 bankruptcy a second time.

But that doesn't mean I think Bill is wrong to put a small percentage of assets into this stock.

That's because this setup reminds me a bit of the single best investment I've made in my career – one for which I owe Bill a debt of gratitude...

I bought more than 1 million shares of mall operator General Growth Properties ("GGP") shortly before it filed for bankruptcy in April 2009.

My average purchase price was just $0.67 a share. By the end of the year, the stock had soared to $11.56 per share – and I had made more than 17 times my money.

I might have been tempted to sell much earlier than I did, but Bill bought a large chunk of the company and gave a brilliant 68-slide presentation at the Sohn Conference on May 27, 2009, which you can see here: The Buck's Rebound Begins Here.

With the stock around $1 per share, he argued that it was worth between $9.11 and $21.50 per share (see page 57 of his presentation).

Bill was ultimately proven correct, as GGP's stock soared above $20 per share (the company was acquired by Brookfield Property Partners for more than $9 billion in 2018).

So why don't I see the same opportunity in Hertz's shares today? There are two main reasons...

The first is valuation.

When I bought it at $0.67 per share, GGP's entire market cap was only a bit more than $200 million. With Hertz, after more than doubling last week, its market cap is about $2.5 billion. That's a big difference...

Second, Hertz is a low-quality, cash-burning business that saw its earnings plunge last year.

On the other hand, GGP (as Bill showed in his presentation) was a great business: Even during the worst of the global financial crisis, its malls continued to generate strong, stable cash flows that far exceeded what it needed to service its debts.

Thus, even though GGP wouldn't emerge from bankruptcy until November 2010, once the panic passed investors bid the stock up because they could see the value of the underlying business above and beyond its debt.

It's unclear whether this will happen with Hertz going forward. To avoid bankruptcy, the company needs to change its downward trajectory by executing well. And it probably also has to get lucky with a jump in used-car prices.

So Hertz at these levels is an interesting speculation... but nowhere near the no-brainer GGP was in early 2009.

Best regards,

Whitney

P.S. I welcome your feedback – send me an e-mail by clicking here.