Cuckoo for Carvana?
Yes, the used car retailer has a debt restructuring plan. But the stock's surge this year. may be yet another example of investors embracing too much speculative risk.
Shares of Carvana are up about 1,000% this year. That is not a misprint. The unprofitable online used car retailer’s shares surged about 35% alone on Wednesday after the company announced a restructuring plan that will cut its debt load by more than $1.2 billion and also preannounced sales that were ahead of Wall Street’s forecasts.
This is, to use some technical jargon, nuts. Carvana was reportedly flirting with bankruptcy not that long ago. The company is still losing money and is expected to bleed red ink for the rest of this year and in 2024. Sales plummeted 24% from a year ago in the second quarter and are expected to decline for all of 2023. This is not a healthy company.
Sure, Carvana’s balance sheet cleanup will help. The worst may be over from a financial standpoint. The debt deal, brokered by top investor Apollo Global Management, may appease big bondholders such as Pimco and Ares Capital. But why does the stock deserve to have a quadruple digit percentage return just because it might survive?
Analysts continue to be bearish. (Insert sarcastic snickers here about the accuracy of the sell-side.) The consensus recommendation on Carvana stock is a “hold” — which is the more polite way of saying “sell.” The average price target is about $15.50, more than 70% below the current stock price of just under $55.
I quoted Steve Sosnick, chief strategist with Interactive Brokers, in a story for CNN earlier this year where he said that the big move in low quality companies was a “flight to crap.” Sounds about right. The Carvana rally on Wednesday (and for all of this year for that matter) is another prime example of how speculative mania is once again alive and well on Wall Street.