Once again, we had one of the top stocks on Wall Street this week. This one was all about game theory. Expectations were low, which meant actual good news had the potential to deliver a truly dramatic impact . . . which we got.
Carvana (CVNA) had been left for dead. The stock traded at $115 back in early 2020, before COVID deranged the global economy and forced markets to dance to the Fed’s tune instead of their fundamentals.
The used car business went into literal overdrive as supply chains faltered. CVNA had a dazed and weary world at its feet. By mid-2021, this was a $376 stock.
But those were bubble conditions and the crash now clearly looks inevitable. Car sales went back to normal. In the depths, it looked like this company, which had never really done anything but lose money, was a prime candidate for bankruptcy once its cash ran out.
The cash never ran out. Instead, management got tough and did what it took to cut costs. As of today, CVNA is profitable at its current scale. It could invest in expansion . . . but it didn’t need that. The business can sustain itself indefinitely.
And suddenly the stock that plunged from $376 to $3 is soaring in relief. Short sellers are still committed to buy back about 1/3 of the shares in order to cover their positions. They need those shares at any price.
The end of the world didn’t happen. News flash: it takes a lot to destroy a company when management is alert and active.
In the absence of catastrophe, the stock looked ridiculously cheap just as it looked ridiculously rich in the COVID boom. We’ve been playing around with it over the past year in GameChangers. This morning, our latest position was up 80% . . . not a bad return for a six-week holding period.
Never bet on absolute disaster. It rarely comes. And when it doesn’t, the price of being wrong is high.
Meanwhile, the reward for being right can be extreme. We learned that today.
“We didn’t disintegrate,” said CEO Ernie Garcia. This company is still alive. When you’re alive, you should have hope. Things can get worse, but they can also get better. That’s why we invest.