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Carvana: Don’t Get Caught in the 26% Drive-By Rally
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Carvana: Don’t Get Caught in the 26% Drive-By Rally

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CVNA stock had a fantastic trading day today. Jumping on the Carvana bandwagon seems like a good idea if you get caught up in the euphoria of a one-day rally. Yet, data-driven investing will make you want to avoid companies like Carvana because there’s too much bad news to ignore.

Earlier today, Carvana (CVNA) stock traders came back from the long holiday weekend and found that there were fireworks in progress, so to speak. The bears went into hibernation, apparently, and social media lit up with bullish posts about Carvana. CVNA stock finished 26% higher today.

Arizona-headquartered Carvana provides an online platform where shoppers can buy and sell used cars in the U.S. I am bearish on the stock.

When the price of a typically under-the-radar stock shoots toward the heavens, it’s tempting to jump into the long side of the trade in hopes of quick gains. However, chasing parabolic rallies, especially when they’re based more on hype than hard data, can turn your portfolio into a veritable car wreck.

Surely, there must have been a positive news story about Carvana, something indicating that the company is about to generate terrific revenue and profits – right?

Don’t be so sure. It’s up to you, the investor, to sift through the noise and determine what’s real and what’s questionable. When it comes to Carvana stock, the bulls’ turn in the fast lane might come to an end very soon.

An All-Day Rally

If this were a fireworks show, it would be one that started off with a handful of sparklers, and the big blasters wouldn’t come out until later. Indeed, Carvana stock opened for trading on July 5 almost flat, barely different from where it closed on July 1.

Yet, throughout the trading session, Carvana stock just kept on rising. From $21 to the day’s closing price of $27.58, the stock gained a head-turning 26% in value, as mentioned earlier. It was, admittedly, pretty amazing to witness this as it happened.

Typically, this type of price action would be accompanied by some positive news catalyst. Yet, Carvana’s investor relations news page showed no recent developments. A deep scan of social media posts and popular financial news websites also didn’t turn up anything that would justify a 26% share-price rally.

There were a couple of analyst price target reductions, but that’s not usually considered good news. In particular, analysts at Needham reduced their price target on Carvana stock from $80 to $31, while Wedbush analysts lowered their price target on the stock from $90 to $50.

Plus, as we’ll see, analysts generally have a Moderate Buy rating on Carvana stock, which is pretty good but not anything that should send the share price to the moon.

There is plenty of worrisome news about Carvana – but more on that in a moment. First things first: What mysterious force could possibly have prompted the sudden surge in Carvana stock? There’s no way to know for certain, but it’s possible that short-squeeze traders on social media sites such as Reddit may have been involved.

Rallies based on massive short squeezes tend to fizzle out, so don’t be too surprised if Carvana stock retraces at least part of its gains.

Problems and More Problems

If you’re looking for reasons to be bearish on Carvana stock, you won’t struggle to find them. First of all, Carvana’s most recently issued quarterly financial report showed an EPS figure of -$2.89, which was even worse than the analysts’ consensus estimate of a $1.44 per-share loss.

Next, around the time of that earnings report, Carvana declared that it intends to raise up to $1 billion by selling shares. A capital infusion might be a good thing for the company, but Carvana’s stockholders ought to be concerned about share-price devaluation if the company is selling so many of them.

Those events took place in April. Moving on to May, Carvana announced that it plans to lay off 12% of the company’s workforce, or around 2,500 employees. While that’s bad news for those workers, it also isn’t a good sign for Carvana.

Then, in June, New Constructs CEO David Trainer called Carvana a “zombie” company, seemingly suggesting that the company is in serious financial trouble. Scathingly but not inaccurately, Trainer pointed out that Carvana has a “dwindling cash supply, intense competition, and [an] elevated valuation” and has “failed to generate positive free cash flow in any year since going public in 2017.”

On top of all that, in July, a report was published alleging that Carvana sold vehicles to its customers before the company actually possessed the legal titles to those vehicles. Just the reputational damage from that report should be enough to dissuade cautious investors from holding Carvana stock this year.

Wall Street’s Take on Carvana

Turning to Wall Street, CVNA stocks comes in as a Moderate Buy based on eight Buys, 13 Holds, and one Sell rating assigned in the past three months. The average Carvana price target is $73.30, implying 165.7% upside potential.

The Takeaway – Carvana Has Poor Fundamentals

When a stock is glowing bright green on your screen, it’s human nature to want to join the bull party. Social media posts can reinforce this euphoric feeling – until the party’s over and you end up holding the bag.

Carvana stock may or may not have rallied based on a short squeeze. Either way, the fundamentals simply don’t justify an informed, confident investment in Carvana stock now. When the euphoria wears off and reality sets in, some traders will likely learn a lesson about what can happen when they chase after high-flying stocks – the results can be swift and painful.

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