Why Car Rental Stocks Are Surging Today

Geopolitical news is providing a lift to the auto rental sector.

Shares of Avis Budget Group (NASDAQ: CAR) and Hertz Global Holdings (NASDAQ: HTZ) each traded up about 20% as of noon ET as investors bet new tariffs on imported vehicles will have a positive impact on their businesses.

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A complex model

A move by the White House to place 25% tariffs on imported vehicles is likely to create a range of winners and losers among automakers and related businesses. The impact, at least in the near term, is to add thousands of dollars to the cost of some automobiles, making alternative options more attractive.

Avis and Hertz have multiple ways to win in this environment. The rental companies on average turn over their fleets every two years, meaning that any uptick in used vehicle prices could add to cash flows. In some cases, consumers could find it more economical to rent a car when needed than to keep one in a garage.

There is also likely a short squeeze going on here today. Avis and Hertz are stocks typically associated with periods of economic expansion, times when companies and consumers are feeling confident about their future and are more willing to spend on travel and vacations. Conversely, in times of economic uncertainty the stocks generally underperform.

Heading into trading Thursday, an estimated 32% of Hertz's float and 11% of Avis' float was sold short. With the stocks going up today, shorts are likely scrambling to cover, creating more demand for the shares.

Is it time to buy car rental stocks?

Historically, this has been a tough industry to invest in. Rental companies have massive fixed costs to acquire their fleets, and vehicles depreciate very quickly. Nothing about the economics of the business has changed, and tariffs are only likely to provide a short-term boost, at best.

Given the uncertain nature of the tariffs, and the short-term nature of the boost even if tariffs are kept in place, long-term focused investors will likely do better looking elsewhere for opportunities.

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Lou Whiteman has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.