After nail-biting for a month, November’s Consumer Price Index (CPI) came in better than expected at 7.1%, marking the second straight month of lower inflation. Inflation also slowed on a month-over-month basis, especially in the market of used cars and electric power. Two stocks that we think are on the path uphill thanks to these cooling prices are CarMax (NYSE:KMX) and PG&E (NYSE:PCG).
CarMax (KMX)
Prices for used cars fell 2.9% in November after a 2.4% decline in October, as the easing of supply chains boosted new car production, killing the demand for used cars. Moreover, rising interest rates dented affordability.
Nonetheless, the used car market is very less likely to ever run out of demand. Also, Pat Ryan, CEO of the car-shopping app CoPilot, recently raised an important point. Considering the risk of higher interest rates and a recession in 2023, this month could be the best time to buy used cars. Moreover, marketing activities by dealers eager to reach end-of-the-year sales targets are expected to increase this month, spurring a fresh bout of demand.
This presents a good opportunity for the used vehicle retail platform CarMax, whose unique selling proposition lies in its after-sale services. Vehicles, new or used, are depreciating assets demanding money to keep them in good condition. CarMax offers extended warranties on used cars, something which is not commonly found.
Granted, CarMax has its own challenges, but despite narrow margins, the business remains profitable. Moreover, the demand for the services of close competitor Carvana (NYSE:CVNA) is likely to turn its attention to the cheaper alternative, CarMax. This creates upside potential for the stock.
Is KMX a Good Stock to Buy, According to Analysts?
Despite being in the shadow of Carvana’s fall from grace, CarMax’s stock has a Moderate Buy consensus rating on Wall Street based on four Buys and seven Holds. The average price target for KMX stock is $79, which is about 16.7% higher than the current price.
PG&E (PCG)
Electricity prices in November were 0.2% lower in November than in October, a piece of warming news in the freezing weather for not only consumers but also for electricity supplier PG&E. There are several reasons that come to mind.
Since July this year, more than 500,000 PG&E customers have received notices of disconnection as financial aid for citizens approaches the end. Cooling prices can help some potential defaulters afford to keep their homes warm and other appliances running. This will, needless to say, benefit PG&E by reducing the loss of customers.
Coming to the technicals and fundamentals, PCG stock has several positives. A beta of 0.73 means the stock is less volatile than the market. Moreover, currently, PG&E is trading around 19 times its trailing-12-months adjusted earnings, which is around a 9% discount to the sector median. Therefore, it may be a good time to scoop up some shares of the company.
Is PCG Stock a Buy, According to Analysts?
Wall Street is bullish on PCG stock, as it has a Strong Buy consensus rating based on five Buys and one Hold. The average price target of $17.67 indicates upside potential of 7.8% over the next 12 months.
The Takeaway
Basic economics says that demand rises as prices fall. Going by this principle, the stocks of CarMax and PG&E seem to have solid upside. Investors looking to make some cash this winter might want to consider keeping these stocks on their radars.
