NEW BEARISH Plays
CarMax Inc. - KMX - close: 56.18 change: -0.80
Stop Loss: 57.55
Target(s): To Be Determined
Current Gain/Loss: Unopened
Entry on October -- at $---.--
Listed on October 17, 2015
Time Frame: 6 to 8 weeks
Average Daily Volume = 1.8 million
New Positions: Yes, see below
Auto sales in the United States are surging and hit 10-year highs. So why are shares of KMX, a huge auto dealer, down -25% from its 52-week high?
KMX is in the services sector. According to the company,
"CarMax, a member of the Fortune 500 and the S&P 500 and one of the Fortune '100 Best Companies to Work For' for 11 consecutive years, is the nation's largest retailer of used cars. Headquartered in Richmond, Va., CarMax currently operates 153 used car stores in 76 markets. The CarMax consumer offer features low, no-haggle prices, a broad selection of CarMax Quality Certified used vehicles and superior customer service. During the fiscal year ended February 28, 2015, the company retailed 582,282 used vehicles and sold 376,186 wholesale vehicles at its in-store auctions."
The major auto manufacturers report their vehicle sales every month. In early October they reported their September car sales and for the industry September sales were up a whopping +16% from a year ago. This has boosted the seasonally adjust annual rate (SAAR) for U.S. auto sales to 18.2 million, a ten-year high.
The Federal Reserve has kept their main interest near zero for years. Low interest rates have generated a boom in auto loans. Depressed oil prices have kept gasoline prices low. The combination has fueled huge consumer demand. Now that the Fed is looking to raise rates we could be near a potential peak in U.S. car sales. Analysts are starting to worry about consumer credit contraction in the auto space. As rates go up consumers can afford less car for the money and dealers make fewer sales.
Shares of KMX peaked in early April after Wall Street reacted to the company's 2014 Q4 earnings report. KMX beat estimates by five cents and revenues were up +14% to $3.51 billion, which was essentially in-line with estimates. Since that report KMX's sales have actually struggled to keep up with expectations.
Their 2015 Q1 report, announced in June, saw KMX beat the EPS estimate by one cent while revenues only rose +7% and missed expectations. Their Q2 report, announced September 22nd, beat the bottom line by three cents. Revenues rose +7.9% but again missed analysts' estimates.
Oppenheimer recently downgraded the stock. They see short-term headwinds for KMX. Plus the company is facing really tough comparisons to the second half of their fiscal 2014, which will be hard to beat.
Technically KMX is in a bearish trend of lower highs and lower lows. Investors have been selling the rallies. Now the stock is testing support in the $55.00-56.00 zone. Tonight we are suggesting a trigger to launch bearish positions at $54.75.
Trigger @ $54.75
- Suggested Positions -
Short KMX stock @ $54.75
- (or for more adventurous traders, try this option) -
Buy the 2016 Jan $50 PUT (KMX160115P50) current ask $1.40
option price is a current quote and not a suggested entry price.
Entry disclaimer: To avoid an unfavorable entry point, we will not launch a new play if the stock gaps open more than $1.00 past our suggested entry point.
Option Format: symbol-year-month-day-call-strike