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Looking for Another Way to Play Hertz? Consider Buying ‘Warrants.’
By Andrew Bary
Updated March 05, 2023, 10:07 pm EST / Original March 03, 2023, 7:05 pm EST
Hertz Global Holdings warrants trade around $10.50 while the stock changes hands at $18.77. (Joe Raedle/Getty Images)
Bulls on Hertz Global Holdings should consider the rental car company’s unusual and attractively priced warrants, which offer an alternative to Hertz common shares.
First, some details on Hertz Global Holdings warrants (ticker: HTZWW). They amount to long-term call options on the stock and trade around $10.50 while the stock changes hands at $18.77. The warrants have an exercise price of $13.80, meaning investors can buy Hertz shares at $13.80 through the maturity date in 2051.
One way to play Hertz is to buy two warrants instead of one share of the stock. The warrants should deliver most of the gains in the stock. On Friday, the stock (HTZ) rose 42 cents and the warrants were up 33 cents.
It doesn’t pay to exercise the warrants now because their intrinsic value ($18.77 less $13.80) of about $5 is less than the warrant price.
But the appeal of the warrants lies in their superlong maturity of 28 years. This means the warrants, unlike regular stock options which typically expire in months or days, won’t experience much time decay. While the warrants will move up and down with the stock, they should continue to hold value as long as Hertz remains solvent.
Barron’s began writing about Hertz warrants in 2021 before the company made its first equity offering, when the warrants were supercheap and at times traded below intrinsic value. We also mentioned them in a bullish recent article on Hertz.
There are a limited number of publicly traded warrants including those of Chesapeake Energy (CHK) and Occidental Petroleum (OXY) but they have maturities of less than five years. The Hertz warrants originated when the company emerged from bankruptcy in 2021 and the company issued them to shareholders of the old, pre-bankrupt Hertz.
One way that pros value options is based on implied volatility. Not surprisingly, options on volatile stocks such as Tesla are pricier than those of more stable ones such as Procter & Gamble.
Implied volatility captures expectations of future moves in a stock. The S&P 500 implied volatility is around 20% while Tesla options embed a volatility assumption of about 60% against P&G at 15%.
The implied volatility of the Hertz warrants essentially is less than zero. Bloomberg data show that if the options had an implied volatility of one they would trade around $13.
There are about 83 million Hertz warrants outstanding and they are liquid with average daily volume of 300,000, against about three million shares for the stock.
There are two nice features about the warrants. They protect investors if Hertz begins to pay dividends by downwardly adjusting the exercise price. And if Hertz is taken over, warrant holders get what is called Black/Scholes protection, meaning they would get a premium above intrinsic value.
The warrants look such as a better bet than Hertz’s pricey stock options, which have an implied volatility of about 40%.
Warrants, such as options, aren’t for everyone, but in the case of Hertz, they offer a nice and relatively safe alternative to the stock.
Write to Andrew Bary at andrew.bary@barrons.com
