Stocks to sell

Meme-stock traders on Reddit might be enamored with used-car retailer Carvana (NYSE:CVNA), but does this mean you should expect a sustained rebound in CVNA stock? Before jumping into a hasty trade, consider Carvana’s fundamentals. Then, you’ll probably decide not to take a share position.

Sometimes, overeager traders will use any piece of news as an excuse to buy a stock. This is especially true with short-squeeze stocks, as get-rich-quick fantasies can fuel speculative frenzies and share-price rallies.

Those rallies can lose momentum very quickly, though. As a sensible, serious investor, be sure to look under the hood before hitting the “buy” button. Sorry to be the bearer of bad news, but Carvana is in desperate need of a financial tune up and could end up in the junkyard.

What’s Happening With CVNA Stock?

The bulls will undoubtedly point out that CVNA stock doubled from $5 to $10 in January. Yet, bear in mind that this was a triple-digit stock a year ago, so Carvana’s long-term investors are still holding a heavy bag.

Most likely, the January bump in Carvana’s share price can be attributed to meme-stock hype, as some traders are constantly looking for the next big winner. Meme-stock pops are often unsustainable, though, so be careful.

I’ve already warned that CVNA stock could fall fast if Carvana’s Feb. 23 earnings report is a disappointment. Meanwhile, some folks might be tempted to take a share position in Carvana because used vehicle prices rose recently.

That could just be a temporary blip on the radar, however. After skyrocketing due to inflationary pressure, used car prices have been rolling over for a while. Per a Barron’s report, “Coming into the December rise, values had slipped for six consecutive months and nine out of the past 10.”

Carvana Is Still Fundamentally Faulty

Even if used car prices somehow remain high for an extended period of time, this doesn’t mean Carvana is a fundamentally sound company. First of all, Carvana’s fourth-quarter 2022 retail sales are anticipated to decline to around 86,000 vehicles. This would represent a significant drop from approximately 113,000 vehicles in the year-earlier quarter.

In addition, Carvana is adopting what it calls a “Tax Asset Preservation Plan,” which is really just a poison pill strategy to preserve its assets. Also, Wedbush analyst Seth Basham called Carvana’s $2.2 billion acquisition of Adesa’s U.S. physical auction business, using debt that carries a high interest rate, as “an albatross around” Carvana’s neck.

Unprofitable and debt-heavy, Carvana is a no-go for forward-thinking investors. Basham assigned a $1 price target on CVNA stock, which might seem harsh. Yet, a rapid share-price decline may be imminent as Carvana has shrinking revenue and a widening net earnings loss.

What You Can Do Now

Sometimes, hype and hope can distort investors’ perceptions. They might get their hopes up because of a one-month bump in used car prices. Then, they may end up wagering their hard-earned capital on a struggling business like Carvana.

CVNA stock might go back up, but I wouldn’t count on it. Instead, consider stocks representing businesses with revenue growth, less debt and a positive earnings profile. Then, at least you’ll be better positioned to prevent a fender bender in your portfolio.

On the date of publication, David Moadel did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the Publishing Guidelines.

David Moadel has provided compelling content – and crossed the occasional line – on behalf of Motley Fool, Crush the Street, Market Realist, TalkMarkets, TipRanks, Benzinga, and (of course) He also serves as the chief analyst and market researcher for Portfolio Wealth Global and hosts the popular financial YouTube channel Looking at the Markets.

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