Short Sellers Take a Hit as Avis Stock Surges 150%

A stock with a heavy short interest. A dwindling stock supply for trading. A price that keeps climbing.

These signals often indicate a potential short squeeze, and they are becoming increasingly pronounced for Avis Budget Group.

Avis shares have surged over 150% in just three weeks, following Pentwater Capital Management’s announcement of acquiring a substantial stake in the rental-car company, which also has a significant investor in SRS Investment Management.

This scenario complicates matters for short sellers, who find it harder to continue borrowing the stock, with costs dramatically increasing, according to financial analytics firm S3 Partners. S3 Managing Director Ihor Dusaniwsky is observing whether traders betting against the shares will hold their positions or decide to cut their losses.

“This stock has experienced a short squeeze,” remarked Dusaniwsky. “It’s much like watching a NASCAR race—the crashes are undeniably gripping.”

As of Wednesday, bearish investors had shorted roughly 43% of the tradable Avis shares, down from 49% in mid-March, according to S3.

When heavily shorted stocks rise significantly, many bearish investors are forced to buy back shares to cover their positions, driving prices even higher in a feedback loop. Recent notable short squeezes have resulted in major market disruptions.

In 2008, a squeeze in Volkswagen AG shares temporarily made it the world’s most valuable company. In 2021, retail investors fueled a rapid rise in Gamestop Corp., leading to significant losses for hedge funds such as Melvin Capital.

Pentwater, managed by Matthew Halbower, revealed last month in regulatory filings that it acquired millions of Avis shares and sold a series of put options on the stock. This drove the share price up significantly in the following days. By the end of March, Pentwater’s stake in Avis reached 22%, according to a recent filing.

Pentwater was founded in 2007 by Halbower, a former portfolio manager at Deephaven Capital Management and Citadel. The Naples, Florida-based firm specializes in event-driven investments and manages over $19 billion in regulatory assets, including leverage, as per regulatory filings.

SRS has long been a supporter of Avis, owning nearly half of the company. Its founder, Karthik Sarma, has served on Avis’s board since 2020. Sarma launched his approximately $14 billion hedge fund in 2006 after departing from Tiger Global Management.

Avis ranks among the largest rental-car companies worldwide, operating over 10,000 locations across nearly 180 countries. Recently, the sector has seen a boost as disarray at US airports led travelers to choose long drives over flights. Shares of Hertz Global Holdings Inc. have increased around 37% since early March, while Avis’s shares have more than doubled in the same timeframe.

In a note this week, Deutsche Bank analyst Chris Woronka observed that Avis’s main business is gaining traction but acknowledged that the recent price movements are likely a result of a short squeeze that may continue to impact shares in the near term. According to analyst estimates compiled by Bloomberg, the company is on track to generate a modest profit this year.

Representatives for Avis and Pentwater did not provide immediate comments. SRS opted not to comment.

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