Carvana stock surges amid stronger retail sales and high short interest By

© Reuters.

Online used car retailer Carvana (NYSE:CVNA) experienced a substantial 12% uptick in its stock price on Thursday, September 14, 2023. This surge occurred within the backdrop of a high short interest in the company’s shares, a factor that can precipitate significant market fluctuations.

The rise in Carvana’s shares mirrored a similar uptrend among other publicly traded used car dealers, including CarMax (NYSE:) and Vroom. This positive market movement was likely propelled by two major factors: August’s robust retail sales data exceeding expectations and the potential implications of an impending United Auto Workers (UAW) union strike.

August retail sales data revealed a 0.6% month-over-month increase, outpacing analyst predictions of a mere 0.1% growth. Even with gas sales excluded, spending was up by 0.2%, contradicting the forecasted 0.1% decline. Auto dealer sales showed both monthly and annual growth, recording over $130 billion in sales compared to $124 to $125 billion in July 2023 and August 2022.

The looming UAW strike could also be fueling investor optimism in the used car market. If no agreement is reached, major unionized U.S. car companies will face a strike starting at 11:59 PM ET on Thursday, potentially leading to a shortage of new cars or higher prices, which could steer consumers towards the more affordable used car market.

Carvana’s notable stock rise can also be linked to its high short interest, with an impressive 30.5% of its outstanding shares sold short, representing 45.5% of its publicly traded float. As such, even slight positive news can trigger a substantial increase in the company’s stock value as short sellers cover or reduce their positions.

However, despite this recent surge, Carvana continues to wrestle with considerable challenges. Earlier in the week, the company completed a debt exchange with some creditors, reducing near-term interest payments and overall debt at the cost of some shareholder dilution. Following this, S&P Global (NYSE:) modestly upgraded Carvana’s debt rating from a D to a CCC-, indicating the temporary relief provided by the debt exchange but also underscoring the company’s unsustainable debt load. Carvana is expected to significantly ramp up its profits before 2026 when its interest payments revert back to cash payments. Therefore, despite the positive market response, investing in Carvana remains a high-risk venture.

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