Avis Budget’s recent share price action is likely due to a short squeeze that will probably continue to drive the shares in the near term.
A highly shorted stock. A shrinking pool of shares available to trade. A price that keeps climbing.
They’re the classic signs of a painful short squeeze, and they’ve rapidly come into view for Avis Budget Group.
Avis shares soared more than 150% in the past three weeks after Pentwater Capital Management said it acquired a sizable stake in the rental-car company, which already has an outsized shareholder in SRS Investment Management.
That’s making it hard for short sellers to continue borrowing the stock, and the cost of doing so has skyrocketed, according to financial analytics firm S3 Partners. S3 Managing Director Ihor Dusaniwsky says he is watching to see whether traders betting against the shares will keep holding on or cut their losses.
“This is a stock that has been short squeezed,” Dusaniwsky said. “This is like going to a Nascar race. The crashes sure are really interesting.”
Bearish investors have shorted about 43% of the tradeable shares of Avis as of Wednesday, down from 49% in mid-March, according to S3.
When heavily shorted stocks rise sharply, some bearish investors are forced to buy back shares to cover their positions, which then drives prices even higher in a feedback loop. So-called short squeezes have produced some of the most dramatic market dislocations in recent history.
In 2008, a squeeze in Volkswagen shares briefly made it the world’s most valuable company. In 2021, retail traders helped spike Gamestop Corp. dramatically higher in just a few days, saddling hedge funds including Melvin Capital with huge losses.
Pentwater, led by Matthew Halbower, last month said in regulatory filings it bought millions of shares in Avis and sold a raft of put options on the stock. The shares soared in the following days. By the end of March, Pentwater’s stake in Avis totaled 22%, according to a separate filing this week.
Pentwater was founded in 2007 by Halbower, a former Deephaven Capital Management and Citadel portfolio manager. The Naples, Florida-based firm makes event-driven bets and runs more than $19 billion in regulatory assets, which includes leverage, according to regulatory filings.
SRS is a longtime Avis backer and owns just under half the company. Its founder, Karthik Sarma, has served on Avis’s board since 2020. He launched the roughly $14 billion hedge fund in 2006 after departing Tiger Global Management.
Avis, one of the biggest car rental companies in the US, has some positive momentum in its core business, Deutsche Bank analyst Chris Woronka said in a note this week. But the recent price action is more likely due to a short squeeze that will probably continue to drive the shares in the near term, he said.
Representatives for Avis and Pentwater didn’t immediately respond to a request for comment. SRS declined to comment.