By Alexander Gladstone and Becky Yerak 

When shares of Hertz Global Holdings Inc. soared after the company filed for bankruptcy a year ago, finance professionals reacted with a mix of confusion and scorn. Stockholders routinely get wiped out in bankruptcies, so who would put money into a stock like that?

Zack Konovitch would. The 33-year-old real-estate broker from Brooklyn, N.Y., said he invested in Hertz near its low point in 2020.

A year later, small investors who bet on the company in its distress are getting the last laugh. The century-old rental-car giant is poised to mint big gains for loyalists on its way out of bankruptcy. It's a result that seemed unfathomable when its business unraveled early in the Covid-19 pandemic and another marker of an upside-down year in markets.

Mr. Konovitch said he is up about $15,000 on his Hertz bet. "I always thought someone was going to come in and buy them out" because the company is one of the biggest rental-car providers, he said.

On Friday, a bankruptcy court approved a winning auction bid that will hand control of Hertz to institutional investors who won a heated competition to buy the company out of bankruptcy as its prospects brightened. Hertz expects stockholders to receive more than $7 a share of value out of the deal, and perhaps as much as $8 a share, as the company emerges from chapter 11.

Hertz closed at $6.27 on Monday in the over-the-counter market. The New York Stock Exchange delisted the shares in October after determining they were no longer suitable, since the company was in bankruptcy.

Driven by individuals trading on apps, Reddit message-board boosters and the boredom of lockdown, financial markets have been on occasion hard to explain this year, including the GameStop Corp. mania, a joke cryptocurrency and a $100 million deli. It's not surprising that standard bankruptcy practice should also get turned around.

When companies reorganize in chapter 11, they must satisfy creditors in full before equity holders get anything. In the rare instances when there's something left for them, it's usually so little the company is a penny stock.

Hertz shareholders avoided being wiped out as the company's prospects recovered to match the bullish outlooks of online traders who piled into the company in June after it filed for bankruptcy protection. Whether or not they were acting irrationally, their view of Hertz ended up closer to reality than the supposed smart money that dumped the stock.

Among sophisticated investors who unloaded Hertz's shares after its chapter 11 filing was the billionaire Carl Icahn, who sold more than 55 million shares -- close to 40% of the total -- for 72 cents apiece. Mr. Icahn retained a position in the debt and expects to make some money there, said people familiar with the matter.

Some small investors, though, were hearing positive chatter about Hertz and started buying.

Hertz investing wasn't coordinated on a central forum such as Reddit's WallStreetBets, the source of much of the GameStop frenzy. Several traders said Hertz simply benefited from word-of-mouth and social-media talk by people who felt confident the well-known company could come back.

Pat Huber of San Clemente, Calif., knew of Hertz's chapter 11 filing but figured the company was large enough that it was likely to get backing from major investment firms.

Bulls like him drove the stock from a trading-session low of 56 cents right after the bankruptcy filing on May 22, 2020, to above $5.50 roughly two weeks later, a rally of nearly 900%.

Mr. Huber said that after talking to a friend, he took a gamble and bought about 300 shares at around $5.35 in June. He then held on through months of volatility and bought more shares, especially when they got down around $1. He said he accumulated 3,000 shares in all, about a third of which he sold earlier this month at about $3.

"I'm kind of upset with myself for getting scared and selling" those shares, said Mr. Huber, a 38-year-old marketing executive for a sandals manufacturer.

Last spring, Hertz needed money to pay lawyers and stay afloat. With its stock strangely surging, it saw a chance to do something almost unheard-of for a company in bankruptcy: sell more shares of itself to the public.

Hertz said at a court hearing in June that it planned to raise up to $1 billion this way. It determined it could use a basket of new shares that had already been approved to sell into the market, and started selling shares on June 15 at roughly $2, while warning of a "significant risk" their value could go to zero.

The Securities and Exchange Commission stepped in despite that cautionary language. It was concerned there was a speculative bubble in Hertz's stock, according to a person with knowledge of the matter. Under pressure from the agency, Hertz abandoned its stock sale in late June after raising only $29 million and shifted to a plan to borrow $1.25 billion from institutional investors.

As rewarding as its chapter 11 exit is likely to be for those who held on, the payout might have been better still had the stock sale continued and enabled Hertz to fund itself without more borrowing, said Thomas Lauria, Hertz's bankruptcy lawyer. The loan it took out instead must be repaid on the way out of bankruptcy, with money that might otherwise go to shareholders.

Hertz declined to comment. The SEC didn't respond to a request for comment.

"It is not a great look for the legal system to label retail investors as irrational for paying $2 a share and then approve sophisticated funds willing to pay $8 per share," said Anthony Casey, a law professor at the University of Chicago, referring to the amount shareholders stand to receive.

Hertz wasn't the only stock to go on a counterintuitive rally after a pandemic-related bankruptcy filing. Shares of J.C. Penney Co. and Chesapeake Energy Corp. also briefly skyrocketed after they filed for court protection. Unlike Hertz, they didn't attract enough interest from buyers to clear their debts, so shareholders were frozen out.

With Hertz, "There's a real fundamental business here, poised to profit from the pandemic recovery," said Andrew Glenn, a lawyer for a group of hedge funds that own stakes in the rental-car company.

The travel industry is on an upswing as consumers -- increasingly vaccinated against Covid-19 and eager to travel -- pay top dollar to get away after months of restrictions. At the same time, the supply of rental cars is constrained, in part because of the semiconductor shortage, pushing prices and margins higher.

This year, groups of private-equity firms and hedge funds emerged to bid for control of Hertz.

Justin Hill, a finance professional who lives in Washington, D.C., bought Hertz shares after learning there was a viable bid for the company.

Scanning Reddit chat boards, he saw users posting that stockholders could end up with between $5 and $10 a share. "I thought that was ludicrous" because the proposal at the time didn't offer any value to shareholders, he said.

But Mr. Hill was monitoring the rise in used-car prices, and he figured a deal for Hertz had a good chance of being improved. "My rationale was: This offer is on the table, but more than likely it will be negotiated for shareholders to get something," he said.

Mr. Hill sold his shares in late March around the time the company said it had accepted an opening buyout offer that offered nothing for shareholders. He had worked as a mortgage broker during the 2008 financial crisis and learned that things can go very wrong very fast, he said.

He regrets not holding on, but added that "the discipline was more important to me than YOLO-ing this idea," referring to the you-only-live-once mantra popular on investing forums.

The winning bankruptcy deal, financed by Knighthead Capital Management LLC, Certares Management LLC, Apollo Global Management Inc. and other investment firms, will pay off Hertz's debts and leave a surplus for stockholders in the form of cash, warrants to buy shares and equity in the reorganized business.

William Wright, who works at a mental-health facility in Madison, Wis., invested in Hertz in late October at $1.80 a share, he said. He felt it was an established company likely to recover after the pandemic.

He said he continued buying over several weeks but sold all but three of his shares in January when he was blocked by his broker from buying more.

Accounting for all of his Hertz trades over the past six months, Mr. Wright said, he has a total return of 154%.

As recently as April 15, Hertz was saying in court documents that its equity was worthless. Less than a week later, bidding intensified and it agreed for the first time to dispense some value to equity holders when leaving chapter 11 -- a suggestion that those who bought the stock despite the dangers had been onto something.

They didn't realize how right they were until Wednesday, when Hertz said it had settled on a deal that showed, if anything, they hadn't bought enough.

--Peg Brickley contributed to this article.

Write to Alexander Gladstone at alexander.gladstone@wsj.com and Becky Yerak at becky.yerak@wsj.com

(END) Dow Jones Newswires

May 18, 2021 18:02 ET (22:02 GMT)

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