By the initial looks of things, used-car dealer CarMax (KMX) seems an incredibly risky wager. Right off the bat, Barchart warns prospective investors that the technical profile of KMX stock sits as a 56% Sell. It’s not the absolute worst outlook but by no means is it positive. Further, analyst consensus – while coming in as a Moderate Buy – is definitely mixed. How then should market participants approach CarMax?
While it goes against conventional wisdom, KMX stock could be an intriguing upside opportunity. Granted, the idea is extremely speculative. Since the start of the year, CarMax lost almost 6% of equity value. In the trailing 52 weeks, it’s down nearly 9%, with the auto dealership struggling for momentum amid consumer headwinds, particularly elevated inflation and high borrowing costs.
Still, the point to remember is that cars are not frivolous luxury items. Sure, in some cases, they can be, especially if consumers buy more car than they can afford. However, the fundamental narrative of personal mobility is a must-have, especially for residents living in areas that do not feature robust public transportation networks.
Unusual Options Volume Puts a Spotlight on KMX Stock
Following the close of the June 17 session, KMX stock represented one of the highlights in Barchart’s screener for unusual stock options volume. This data interface showcases options activities that have deviated from normal volume patterns. One of the benefits of assessing this screener is that it helps identify ideas that the smart money may be targeting.
On Monday, total volume for KMX stock options reached 13,904 contracts against an open interest reading of 83,794 contracts. The difference between the aforementioned print and the trailing one-month average metric came out to 259.18%. Further, call volume hit 11,018 contracts while put volume landed at 2,886.
At face value, the put/call volume ratio pinged at 0.26, which suggests bullish sentiment; that is, more traders are engaging call options than put options. Drilling into the day’s options flow screener – which filters exclusively for big block transactions likely placed by institutional investors – the net trade sentiment for KMX stock options reached $109,300, favoring the bulls.
That’s significant in large part because CarMax is scheduled to disclose its earnings results for its fiscal first quarter at the end of this week. Analyst estimates call for earnings per share to hit 98 cents on revenue of $7.25 billion. In the year-ago quarter, CarMax posted EPS of $1.44 on sales of $7.69 billion.
Admittedly, the optics aren’t great. However, two upgrades have recently been issued, one of them from analysts at William Blair, who anticipate CarMax to post EPS of $1.03. It’s a small signal, sure, but the rising tide also points to the fundamental narrative underlining KMX stock.
Vehicles on U.S. Roadways Aren’t Getting Any Younger
Citing data published by S&P Global Mobility, automotive journal Car and Driver mentioned that the “combined average age of passenger cars and light trucks has now reached a record high of 12.6 years.” Further, the publication stated that “[p]assenger cars help increase the average age, measuring 14.0 years compared to 11.9 years for light trucks, according to S&P.”
On first reading, this framework doesn’t exactly cast a positive light on KMX stock. Inflation continues to be a massive headwind against American households, which was a key problem that sank CarMax following its disappointing fiscal Q4 earnings report, released in late February.
However, the math may eventually work in the used-car dealership’s favor. It’s clear that households are hurting and they’re doing everything they can to keep their rides until the wheels fall off. However, vehicles eventually become money pits. Moreover, there are costs in lost productivity tied to constantly getting flailing cars and trucks repaired.
At some point, the financial math would dictate that it’s simply better to buy a replacement vehicle. Plus, with CarMax’s extended warranty called MaxCare, consumers can purchase additional peace of mind.
Lastly, social cohesion has taken a hit following the Covid-19 pandemic. Records show that certain crimes have increased on U.S. public transit networks. Just from a safety standpoint, there’s an incentive to own a properly functioning personal vehicle.
With the fundamentals pointed in a positive direction, KMX stock could be an interesting buying idea.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
