Everyone loves discounts. Unfortunately, targeting securities merely based on their low price can often lead to succumbing to valuation traps. In other words, cheap stocks are that way for a reason – typically not a good one. And that sucks in retail investors who have been initially tantalized by the allure of a discount gone bad.
A better approach may be to find robust investments that are currently “baselining” in a consolidation pattern. Barchart provides just such a screener for the job. Called Upwards Base Consolidation, this tool filters for securities that have previously exhibited a strong upward trend but are presently consolidating near their market top. It identifies possible sideways price congestion that could lead to a breakout move.
You’ll find this tool near the top of the Barchart Screeners section. Best of all, the information is free: no gimmicks, no signups, no nonsense – just technical analysis filtered through objective data.
What makes the Upwards Base Consolidation so compelling is that it may highlight securities that are in the beginning stages of printing bullish pennant or flag formations. Such technical patterns typically resolve to the upside after posting a spike-consolidation-spike cycle. By buying in early during the consolidation phase, speculators may enjoy robust upside on the other end.
For this edition, I’m particularly intrigued with the identification of online automotive platform Cars.com (CARS) as a possible hit.
CARS Stock May Be Coasting in Neutral Before Shifting Gears
According to Barchart’s Key Statistics page, Cars.com “offers new and used vehicle listings, expert and consumer reviews, research tools and other information. It also engaged in the sale of display advertising to national advertisers.” Based in Chicago, Illinois, the company has enjoyed a decent start to the year, gaining over 11% since the beginning of January.
Over the past 52 weeks, CARS stock gained roughly 7%. However, it’s still relatively undervalued, sitting just under parity compared to its trailing five-year performance. What really caught traders’ attention, though, is the recent price action. In the trailing month, shares moved up nearly 19%. Seemingly, such a robust move goes against the datapoints suggesting that consumers are struggling against elevated inflation and borrowing costs.
While a risky idea, CARS stock enjoys strong analyst support. Among seven experts, six of them rate shares a Strong Buy. The lone holdout rates it a pensive “Hold.” What’s more, this assessment has remained the same as three months ago. That’s a win in my book as it implies that despite sustained pressure against the consumer, American households are still ponying up for new replacement vehicles.
Further, CARS stock closed at $20.47. Analysts are looking at a mean price target of $24.42, implying over 19% upside potential. Further, the most optimistic target calls for a price per share of $27. If so, we’re talking about nearly 32% of shareholder profitability.
For fiscal 2024, analysts anticipate that revenue will reach $737.13 million. That’s up 7% from last year’s tally of $689.18 million. Further, the blue-sky sales target stands at $741.1 million. Assuming that the company reaches this lofty goal, CARS stock would be trading at 1.83X projected revenue.
That’s still steep for the underlying industry. However, about a year ago, CARS stock traded hands at 2.06X trailing sales. Therefore, the company effectively has the ability to expand its valuation, which lends credibility to Barchart’s Base Consolidation tool; that is, CARS quantitatively has the potential to shift into higher gear.
Is the Used-Car Market Crashing? Not Really.
It must be said that on video-sharing platforms, it’s not unusual to come across content that claims the used-car market is crashing. By logical deduction, acquiring CARS stock might not seem a particularly positive idea. However, what we’re experiencing may be a normalization rather than a crash.
Have used-car prices fallen from their peaks? Absolutely. According to the sector consumer price index (CPI), prices fell about 17% from the highs. However, compared to rates seen in February 2020 (right before the COVID-19 pandemic), used cars are 28.4% more expensive on average.
Yes, there is an argument to be made that this pricing premium needs to be corrected – hence, all these used-car crash videos. However, the real M2 money stock has expanded by 11.9% between February 2020 and April 2024. Therefore, used-car prices may decline somewhat. However, it’s unlikely to decline below the expansion of the money supply.
Why’s that? Fundamentally, it comes down to the fact that for millions of Americans, access to personal transportation is a must. Moreover, with social normalization kicking in, if additional companies require some level of in-office work, that will likely boost demand for vehicles.
This framework doesn’t call for an actual deflation in the used-car market. Once investors figure that out, CARS stock could be off to the races – just like the Barchart Upwards Base Consolidation tool is suggesting.
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.
