CarMax’s (KMX) shares have seen quite a bit of volatility this year. The stock started the year with positive momentum, thanks to increased consumer confidence post President Trump’s victory. However, the stock came under a short attack in the March and saw a steep correction. The main argument on the bearish side (Jim Chanos, Morgan Stanley’s Adam Jones) was significant worsening in CarMax Auto Finance’s (CAF) performance due to potential write-offs of bad loans as used car prices fall sharply. Morgan Stanley analyst Adam Jones predicted a doomsday scenario in which used car prices could crash up to 50% over the next 4-5 years.
Bears were initially able to drive down share prices, which corrected mid to high 60s in February to $55 in April. I saw this as an opportunity and reiterated my positive stance going into the company’s Q4 earnings (April 06, 2014) to my subscribers. The company reported better than expected results, and the stock is in an uptrend since then. Over the last few months, the bearish concerns have been proven wrong, the company is seeing strong comp sales trends, and its CAF business seems to have bottomed. CarMax’s valuations also look accommodative, and the stock can see further upside going forward. Here’s a look.
