Hertz Moving In Sympathy With Avis Budget

Sympathy trade, or otherwise trading in a stock based on the news impacting another stock belonging to the same sector, is one of the trading strategies investors can profitably adopt to their advantage.

Following the release of disappointing quarterly results and slashing of guidance by car rental company Avis Budget Group Inc. CAR, its stock was down by 9.07 percent at $30.36.

Rival Hertz Global Holdings, Inc HTZ, though not down as much, was seen down 3.02 percent to $14.78. The company is scheduled to release its second-quarter results Tuesday after the close of trading.

Source: Y Charts

Avis Budget reported Monday after the market close a steep drop in second-quarter earnings per share, weighed down by a sharp increase in depreciation charges.

Weak auto demand is pushing down the value of second-hand cars bought by these companies, forcing them to write down the value of the vehicles.

The company's adjusted earnings per share of 30 cents trailed the consensus estimate of 58 cents. Revenues were little changed at $2.2 billion, about in line with the Street estimate.

Avis Budget also lowered its full year adjusted earnings per share guidance from $2.85–$3.50 to $2.40–$2.85. This compares to the consensus estimate of $2.77 per share.

See also: Sympathy Moves, Explained: Unsympathetic Earnings Season Continues As Nvidia, Advanced Micro Devices Diverge

Expectations for Hertz Global is muted, with analysts, on average, expecting a loss of 21 cents per share compared to earnings of 41 cents per share in the year ago quarter. Revenues are expected to slip 2.20 percent to $2.22 billion.

How To Profit From Sympathy Moves

Sometimes a news that has no bearing on a particular company may still impact a stock, just because of sympathy move. It could be due to trading algorithms set to automatically sell a stock if a related stock declines below a particular limit. In such a case, one stands to profit from a subsequent bounce back, as the traders adjust for the sympathy sell-off.

Investors can also execute a pair trade once a sympathy move is identified. Buying the stock impacted by the sympathy move and shorting the stock directly impacted by the news would help to profit from the differences in the relative performance of these stocks.

At time of publication, shares of Hertz were down 1.84 percent at $14.96. Shares of Avis were down 8.82 percent at $30.44.

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Image Credit: By Farhan from Karachi, Pakistan (Faisalabad Hertz) [CC BY 2.0 (http://creativecommons.org/licenses/by/2.0)], via Wikimedia Commons