Don’t sneeze at this squeeze

At first glance, Avis Budget Group appears to be just like any other meme stock, soaring 113.59% in just the last month for seemingly no reason at all. The rental car company was one of the OG meme stocks back in 2021, and its wild rally since March 20 pushed the stock up 667% at its high point on Tuesday, surpassing its gains from a half decade ago.

That said, retail traders are shockingly uninvolved in Avis’ sudden surge, which has been anything but a straight ride upwards. Trading was halted due to volatility on Tuesday, and on Wednesday the stock lost 37.82%, its worst day in 28 years—before it fell another 48.38% today.

Short sellers put the pedal to the floor

Like all meme stocks, Avis has been getting short-squeezed: A stock climbs high enough and fast enough that short sellers are forced to buy shares and cover their positions, in turn propelling the rally higher, in a sort of self-fulfilling prophecy. How it’s getting short-squeezed is the unique part.

Of the 35.26 million shares of Avis available on the market, two hedge funds own the vast majority: SRS Investment Management (17.4 million shares) and Pentwater Capital (7.8 million), leaving everyone else with roughly 10 million shares to buy or sell (the float). About 49% of that float was held by short sellers at the end of March—not exactly a vote of confidence.

For those too lazy to do the math, SRS Investment Management and Pentwater Capital combine to own about 72% of Avis’ outstanding shares. But, through a series of financial finagling involving cash-settled total return swaps, the two funds really own 108% of the stock. That might raise some eyebrows, but it’s legal, if not exactly smart: Over-ownership like that is exactly what kicked off the GameStop meme stock madness of yore.

But this time around, the spark came after Pentwater spent February buying up shares of Avis, while also selling puts expiring on March 20. The firm exercised its massive block of in-the-money puts that day, forcing the delivery of millions of shares to offset its options contracts—pulling those shares from an already-small float.

None of that would have mattered if the government wasn’t partially shut down. But long security lines at airports thanks to TSA agents walking off the job pushed travellers to rent cars instead, giving Avis shares an unexpected jolt. As the stock climbed, short sellers needed to buy shares to cover their positions—at which point they discovered that there were so few shares available in the float thanks to Pentwater’s puts that there were more shares sold short than there were shares available to buy back.

In other words, the squeeze was on.

So, what comes next?

Today’s decline might be the pullback that we all knew was coming. After all, there was a reason the company was so heavily shorted: It’s a terrible investment. Both Deutsche Bank and Barclays have cut their ratings on the stock since the squeeze began, noting that Avis is now trading at a massively inflated valuation for a company that is bleeding profits and deeply in debt.

Then again, Avis has an opportunity to follow in GameStop’s footsteps, capitalizing on the moment by issuing new shares and using the money it raises to pay off its debt.

Regardless of what happens in the coming days, if you were lucky enough to hold Avis before shares rocketed to the moon, you might want to consider locking in your gains while they’re still stratospheric.—MR