IBD 50 Stocks To Watch: Can Carvana Pare Losses And Live Up To Its Price Targets?

It’s been a tough market to nail down lately, and one of the few sectors showing consistent strength has been retail stocks. Today’s IBD 50 Stock To Watch pick is part of the auto retailer industry group, which has rallied more than 29% this year, beating the S&P 500’s market-leading 10% advance.


Carvana (CVNA) has lagged the industry’s growth, but still outpaces the overall market with a 16% gain. It is also forming a new cup base, just as it prepares to file its first-quarter report.

Most of the stocks in the group have done well, as new- and used-car sales have soared after the Covid-19 pandemic drove consumers away from public transportation. Among the group’s highest-ranked leaders, America’s Car-Mart (CRMT) has soared 42% since Dec. 31. Lazydays Holdings (LAZY), a chain of RV dealerships, is up 44%. AutoNation (AN) has rallied more than 49%.

Stock To Watch: Carvana’s Advantage

The pandemic has also accelerated the transition among consumer to online sales. While other companies in the group are a hybrid of brick-and-mortar and online retail, Carvana is designed from the ground up as an online retailer. That includes a seamless purchase process in which cars are delivered to the customer’s door, or dispensed through massive vending machines. Autos also come with a seven-day trial period. If you decide you don’t like or don’t want the car for any reason, you receive a full refund with no penalties.

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Other companies have been quick to emulate many of those traits. But Carvana has a techier feel, one for which younger shoppers in particular have a more intuitive sense.

Heading toward the company’s first-quarter report, scheduled after the market closes on Thursday, analysts are mixed. Bank of America on Monday upgraded the stock to buy from neutral and gave it a price target at 350, or 25% above Tuesday’s price quotes. On Thursday, Oppenheimer held the stock’s rating at outperform, while raising the price target to 355 from 250.

Estimating The Upside

Meanwhile, Wedbush remains neutral ahead of the earnings report. An April 28 note projected “more upside than downside risk,” and unit sales coming in above consensus for the remainder of the year.

Consensus views call for the company’s losses to narrow to 69 cents per share for the first quarter. Revenue growth is forecast to soar 77%, in a third straight quarter of acceleration.

“We expect the traditional strong spring selling season to last well into the summer,” the Wedbush report said, and demand for shopping and purchasing vehicles online should “continue to rise even as Covid risks wane.”

But Wedbush has a price target of 190, and says all of that upside has already priced into the stock.

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Auto retailing is a capital-intensive business, and building and maintaining inventory is not cheap. In addition, the company is expanding rapidly in states as diverse as Utah and Florida. So it is no surprise that long-term debt is up more than 80% over the past year, to above $1.68 billion. That puts Carvana’s debt-to equity ratio at 417%. CarMax, by comparison, has a DOE ratio of 355%. Lithia Motors has a 78% ratio; AutoNation is at 55%.

At some point, a follow-on offering of shares — something that tends to pressure stock prices, at least temporarily — is possible to try to knock down some of that debt. At the same time, Carvana held a fairly healthy $300.8 million in cash on its balance sheet at the end of 2020, a 295% increase for the year. CarMax reported its cash cache up 127% to $132.3 million at the end of its fiscal year. AutoNation won the industry’s cash award for the year, growing its reserves from $42 million to $569.6 million at year-end.

A New Buy Point On Tap

In addition, Carvana still enjoys some technical dispensation for being one of the newest stocks in the 23-company group. Shares are up 1,780% from Carvana’s April 2017 IPO. And they are now coiled in a tidy 10-week cup base with a buy point at 323.49, according to IBD MarketSmith analysis.

The stock on Tuesday was about 15% below that entry, but also appeared to be forming a handle. The handle would lower Carvana’s buy point to 301.26. Carvana was less than 7% below that buy point on Tuesday.

Overall, the base formed largely below its 10-week moving average, which makes the pattern weaker. Its relative strength line is trading just off its mid-February high. Carvana’s Relative Strength Rating is a very solid 90.

Find Alan R. Elliott on Twitter @IBD_Aelliott


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