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
