Skip to main content

Genius Group Limited(GNS-A)

Today's Change
Real-Time Last Update Last Sale Cboe BZX Real-Time

How Should Investors Approach the Dramatic Lift in Carvana (CVNA)?

Barchart - Thu Feb 9, 2023

Absent any context, the sudden rise of Carvana (CVNA) for the Feb. 8 session suggests a burgeoning long-side opportunity. It’s not just that shares of the used-car retail and delivery service provider jumped over 27% at its peak before eventually closing the session up 6.22%. Rather, CVNA stock gained while the major equity indices conspicuously printed red ink.

In large part, Wednesday’s broader losses centered on a set of mixed earnings reports. From disclosures of weaker-than-expected profits and revenues to announcements of significant job cuts, investors had to digest a range of anxious developments. As well, ongoing debate exists regarding the Federal Reserve’s approach to interest rates, especially amid much stronger-than-forecasted employment figures.

As circumstances stand right now, more dollars are chasing after fewer goods. Given that this framework conflicts with the Fed’s expressed purpose of controlling inflation, higher benchmark interest rates may be inevitable. If so, that could spark further slowdowns in several industries, leading to the layoffs that would impose a dark cloud over CVNA stock.

Yet Carvana this year has looked a much different beast than the one just several weeks ago courting bankruptcy rumors. On a year-to-date basis, CVNA stock gained a stunning 202.59%. According to Barchart’s YTD performance index, Carvana isn’t quite number one – that status belongs to Genius Group (GNS). However, it’s close, coming in eighth place.

Despite the incredible turnaround, context is everything. Unfortunately, as the Motley Fool pointed out late last year, there are legitimate reasons to avoid CVNA stock. Fundamentally, its operations are deteriorating. As well, creditors have grown increasingly worried about getting their capital back.

Further, prospective speculators only need to widen their chart view. Against the trailing year, CVNA stock dropped more than 91% of equity value. Needless to say, companies don’t lose that much value without something going terribly wrong.

Why Investors May Want to Avoid the Short-Squeeze Idea

Now, given that Carvana imploded mercurially, this dynamic also sets up the possibility of an extreme contrarian trade. Basically, with so many people bearish on CVNA stock, some upside momentum may scare the “negative” traders off their short positions. After all, since a publicly traded security theoretically features no maximum price ceiling, an indefinite rise can blow up the most obstinate bears.

Plus, the meme-stock phenomenon that enriched many contrarian retail investors adds to the FOMO or the fear of missing out. Because of Carvana’s incredible upside performance so far this year, CVNA stock seems like the next embattled video-game retailer or cineplex operator turned genius upside investment.

However, it might be incredibly difficult for lightning to strike twice. True, Carvana’s short interest currently stands at 65.43% of float. That’s wildly elevated. Typically, you’re looking for short interest of above 20% as a possible short-squeeze candidate.

Not surprisingly, Fintel’s proprietary Short Squeeze Score rates CVNA stock as 88.57 out of 100. In this case, higher numbers indicate greater probabilities of a short squeeze materializing relative to its peers. So far, so good – if you want to thrash some bears, that is.

Nevertheless, the reality check arrives in the form of the short interest ratio, which for Carvana sits at 0.86 day to cover. Usually, the strongest short-squeeze candidates will feature an above-20% short interest and a short interest ratio of 10 days to cover or more. Right now, CVNA bears can’t run away from would-be short-squeezers on the horizontal plane. However, they can escape through the vertical plane.

In addition, Fintel also notes that short shares availability or the number of shares available to be shorted at a leading prime brokerage increased from 150,000 shares earlier during the Feb. 8 session to 400,000 shares hours after the closing bell. In addition, the short borrow fee rates – while elevated – have generally stabilized over the last few weeks.

While it’s not impossible for CVNA stock to experience a short squeeze, it’s a risky wager.

Carvana Sees Limited Incentives

Fundamentally, what contributed to the dramatic rise in Carvana shares was used-car demand that bounced higher than analysts anticipated. To make a long story short, consumers prefer buying three-year-old used cars. By this point, most cars have depreciated by about 40%. As well, they may still have some warranty coverage left.

However, three years ago, the COVID-19 crisis snarled global supply chains. And that meant fewer new cars were built, leading to less inventory of three-year-old used vehicles. Therefore, competition accelerated for these desirable units.

While an intriguing catalyst for CVNA stock, the main problem is that it’s not an exclusive benefit. Basically, the underlying enterprise will still need to compete with sector rivals. Unfortunately, this competition puts Carvana in the backseat.

During the worst of the pandemic, Carvana’s car-delivery service represented a premium which people were more than willing to pay. However, with COVID fears fading, consumers are no longer willing to pay said premium, particularly with inflation impinging the wallet.

Without an overriding need for car-delivery services, Carvana lacks relevance. And that makes CVNA stock wildly suspect.

More Stock Market News from Barchart
On the date of publication, Josh Enomoto did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.

Provided Content: Content provided by Barchart. The Globe and Mail was not involved, and material was not reviewed prior to publication.

More from The Globe

This Canadian aerospace stock deserves a place on your watch list
Robert Tattersall