Shares of Avis Budget Group Inc. took a breather Wednesday, after some Wall Street analysts recommended that investors who owned them should sell them as a “short squeeze” triggered an “unprecedented” rally in the previous session.
Analyst Ryan Brinkman at J.P. Morgan said the car rental company’s fundamentals are “stellar,” but after the stock more than doubled on Tuesday, valuations led him to swing to bearish from bullish.
Brinkman downgraded the stock two notches to underweight, after being at overweight since August, saying the large run-up in the shares were likely triggered by a “short squeeze,” and now more than reflects “attractive” company-specific and industry fundamentals.
“While we had only recently upgraded Avis shares to overweight…and fundamentals are the strongest they have ever been, the unprecedented run up in Avis shares (which already stood at record levels even prior to Tuesday’s meteoric rise) prompt our downgrade to underweight, including given the consideration that the shares may have risen in part for technical reasons apart from the fundamentals, suggesting the potential to normalize lower over the short term,” Brinkman wrote in a note to clients.
He more than doubled his stock price target to $225 from $100, but the new target still implied 37.0% downside from Tuesday’s closing price.
dropped 10.7% in premarket trading Wednesday.
On Tuesday, the stock blasted 108.3% higher to a record close of $357.17, after paring an intraday gain of as much as 217.9%, as blowout third-quarter results followed a recent sharp increase in short interest, or bearish bets, while the stock soared ahead of the results.
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Deutsche Bank’s Chris Woronka, who noted in a research note ahead of Avis’ earnings that short interest had increased as the stock rallied, downgraded Avis to sell, after being at hold since October 2019.
He raised his stock price target to $210, less than a week after he raised it to $119 from $92.
“Our first order of business is to emphasize that this downgrade is not a call to short [Avis’ stock],” Woronka wrote. “Simply put, it is a view that investors who owned the stock prior to Tuesday should take profits.”
He said he simply couldn’t justify, “using any reasonable traditional valuation metric,” the more than $10 billion in value generated by the stock’s rally on Tuesday. He acknowledges, however, that the “unnatural and volatile trading in the stock,” coupled with high short interest, could lead to additional gains based on technical or shareholder dynamics.
“But to reiterate, if we were in the shoes of an institutional investor and owned the stock currently, from a fundamental risk-reward standpoint, we would sell it,” Woronka wrote.
The stock has hiked up 857.6% year to date through Tuesday, while the Dow Jones Transportation Average
of which Avis is a component, has climbed 36.2% and the Dow Jones Industrial Average
has advanced 17.8%.