Invest your own money, let compound effect be your leverage, and avoid debt like the plague.
- Manlobbi
Investment Strategies / Falling Knives
No. of Recommendations: 19
Carmax at $40.87, about a quarter of the price a little over four years ago. I guess that counts as a falling knife.
This is a long term loser that I still watch. And own, sort of--see below. However I do think they will do well from here.
Yes, they have more credible competition from Carvana now, and competition is never good for profitability, but they're still the biggest used car dealer in the US, and they still make a lot of money most of the time.
If you don't know their business model, the single most important thing to understand about them is that to a first approximation the price of cars, and used cars, doesn't matter all that much to them. Mainly they make money on volume--a relatively constant amount per car--and used cars get traded in good times and bad. Consequently the stock price goes up and down a whole lot more than the value of the business does.
Stock prices could always go lower, and that dry spell could last quite a while. The future is uncertain. But I still expect the share price to double soon enough that the return from now till then will be quite pleasant. And this entry price might not be so bad: they have been doing quite a bit better than the average large cap for the last 8 weeks, so the relative-to-market bottom might perhaps be done with. Maybe.
About 2.2 years ago, when the price was into its bear cycle, I switched my long position for repeated cash-backed put writing. The stock has fallen at a rate of -16.2%/year since then, but my return has been -5.4%/year since then because of the extra option premium cushion. I'm losing, but not as much. I might go simply long again now, or soon. It's one of the very few US stocks I'm still long.
Jim
No. of Recommendations: 4
Carmax at $40.87...
Ha! Up 6.5% from there this morning.
Better to be lucky than to be smart, even if it comes to sounding smart in a post.
Unless some agentic bot with money is reading my posts...
Jim
No. of Recommendations: 1
Thanks, this is one I've followed for many years after you mentioning it. Price per share seemed to drop since the pandemic as used car scarcity fell but agree overall a business that tends to make money and probably a decent entry point.
No. of Recommendations: 13
If you don't know their business model, the single most important thing to understand about them is that to a first approximation the price of cars, and used cars, doesn't matter all that much to them. Mainly they make money on volume--a relatively constant amount per car--and used cars get traded in good times and bad. Consequently the stock price goes up and down a whole lot more than the value of the business does.
This has been my thinking as well for the last 3.5yrs following them and they have done exceptionally well maintaining that constant amount per car. What they have not done very well is determining how to keep per store unit sales volumes from dropping. They currently look to be on track to set an all time low this year nearing 3000units/store. They desperately need to figure out how to drive that back up near 4000units/store and get net earnings per store back closer to $4M.
I'm not certain how quickly this can happen with the continued strain on the lower 50-60% of american consumers. The new consumer sales at my employer will be flat at best this year and near the bottom of our normal projected cycle. Price inflation on larger ticket manufactured items like cars has far outpaced wages over the last 5+ years and longer term loans have put customers in some near zero equity positions when they look to trade in for newer goods. Lower interest rates are providing some relief but a customer that purchased something 4 years ago is still likely looking at a 40-50% increase in payment to trade in my world (not cars). I think KMX is feeling similar pressures and may continue to feel them for at least the next 12-18mo.
The one positive note is they seem pretty intent on continuing to buyback 4M or so shares a quarter. Maybe with new leadership coming in they throw all the bad news into these last two quarters and get the ship moving in the right direction. Someone certainly seems to like it this year. And an agentic bot reading your posts is certainly a non-zero probability these days.
Jeff
No. of Recommendations: 5
This is a decent summary video of their history and current challenges. Most of which has already been discussed, but I still found it interesting.
https://www.youtube.com/watch?v=WkZ9rpwilWUCarMax completely changed how Americans bought used cars. No haggling, full transparency, massive scale — and for decades, it worked. By 2021, CarMax was generating over $32 billion in revenue and selling 1 out of every 25 used cars in the U.S. It looked like one of the most durable retail businesses ever built. Then the cracks started to show.tecmo
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No. of Recommendations: 4
One new twist to the KMX story could be the recent decree by the President that credit card companies cap interest rates at 10% for a year. With KMX average customer loan rates at 11%, there could be an impact.
I work for a captive finance company and we currently have no idea how this impacts us. Is it only unsecured credit that is subject to a cap? If we secure credit with an asset can we extend a higher rate? We live in strange times.
Jeff
No. of Recommendations: 1
isnt the immediate move is massively cut credit to risky consumers? these companies know their customers risk better than their own friends&family.
e.g., in ~3 decades of paying my cards on time and in full, i have never been offered a rate change because it would be pointless. but offers to up my max limit comes regularly.
the end result would be an effective tightening that partially offsets trumpedo's 0% fedrate fantasy.
