How Carvana Became a 'Zombie Stock'

I've known smart people on both sides of the Carvana (CVNA) trade – investors who were long and short... Anybody long – for a good part of four years – made a bundle on the online used-car retailer, which is known for its multistory car vending machines. But as the company's results and near-round trip […] Not rendering correctly? View this e-mail as a web page [here](. [Empire Financial Daily] How Carvana Became a 'Zombie Stock' By Herb Greenberg --------------------------------------------------------------- ['God Code' Now Programmable]( For the past 50 years, developers and programmers used the binary code to create every piece of software you use today. But now, highly specialized programmers are using a different code to make everything from vaccines to plant products to data-storage devices and more. McKinsey, a leading consultancy, claims this code will usher in a $4 trillion industry. And Wall Street is starting to take notice. The man CNBC nicknamed "The Prophet" says he's found the one little-known company that has the potential to rule this industry and become America's Next Big Monopoly. [Get the full details here](. --------------------------------------------------------------- I've known smart people on both sides of the Carvana (CVNA) trade – investors who were long and short... Anybody long – for a good part of four years – made a bundle on the online used-car retailer, which is known for its multistory car vending machines. But as the company's results and near-round trip of its stock show, the shorts were onto something. And even here, with CVNA shares hovering less than $10 away from the 2017 initial public offering price ("IPO") of $15 – and a fraction of where they were at last year's high of $360 – Carvana lands in a category that David Trainer of research firm New Constructs [calls a "zombie stock."]( The term "zombie stock" refers to companies that Trainer says are "at risk of going bankrupt if they cannot raise more debt or equity, which is not as easy as it used to be." This is the same company that led the list of "Enron look-alikes" published in January by my friends at Kailash Concepts, who have become staples in my Empire Financial Daily essays. They weren't alleging that Carvana is a fraud, just that it was part of a group of companies that failed an earnings manipulator tool Kailash created. You have to understand... while I've never written about Carvana, I've been hearing about it from shorts since at least 2018, with a myriad of concerns. Among them... - The way the company really makes money - Its lending strategy - Related-party dealings - Insider sales There are even issues with the way Carvana handles car titles – something that was the focus of a [recent Barron's article](. And that's merely the latest in a string of critical articles or research on Carvana. These include one from Trainer in 2020... As he wrote at the time... Carvana has failed to generate positive free cash flow in any year since going public in 2017. One fund manager I know, who has invested for decades in tech, shared the Barron's story on LinkedIn and wrote... I've rarely seen a public company with so many obvious red flags. And for all to see, as well, if they bothered to read the filings. As Kailash Concepts [put it]( a year ago... We give Carvana credit: they are transparent about their lack of transparency. The disclosures are rigorous. And [more recently](... In our imperfect view, everything you need to know about the company can be found on the Securities and Exchange Commission website. Read through the disclosures on pages 12-22 of their 2020 Form 10-K. From the Byzantine ownership structure (page 12) to the myriad issues and risks afflicting the company, the disclosures look both rigorous and clear to us. --------------------------------------------------------------- Recommended Link: [Louis Navellier details the big day coming for cash holders]( The explosive rise of tech stocks we saw last year was just the beginning. Louis Navellier – who's been nicknamed "The Earnings Whisperer" – just released a video detailing several key steps he believes every American should be taking right now. [Watch it here](. --------------------------------------------------------------- And therein lies the crux of the issue here... It's not just with Carvana, but with more than a few growth companies that now resemble value traps... Investors look the other way if everything else seems to be working – especially the stock. That was the case at Carvana – especially after the COVID-19 pandemic hit, when the company found itself in the right place (a sizzling stock market) at the right time (during a car shortage) with the right product (selling used cars online.) Despite all of the disclosures and red flags, Carvana had disrupted the used-car industry – not just with online trade-ins and sales, but also challenging CarMax (KMX) as an alternative place to sell cars. In effect, Carvana was disrupting CarMax the way CarMax disrupted the used-car industry 20 years earlier! Making Carvana harder to bet against was the fact that insiders owned more than half the shares. At one point, Carvana appeared to be growing so quickly that investors were lulled into the belief that the company's business model would transcend whatever concerns the market had, paving the way for the company to make it into the mainstream. But there was an inherent flaw in the model itself – something that would only show up if sales slowed, as they did... Carvana made most of its money from financing its cars and then selling its loans. The company itself says that the bulk of its profits come from the gain on those sales. That works well when interest rates are at near-zero and there are rising sales... but not so much when that reverses itself. As a result, as New Constructs recently wrote... Despite raising capital just three months ago, Carvana will likely need to raise more before the end of this year. This gets us to where we are today: Carvana is now struggling to convince investors this latest rout is just a bump in the road. But it's not a bump – it's a sinkhole, taking investors down with it. And the saddest part of the story... In January, CEO Ernie Garcia III gave employees $100 million in stock from his personal stash to celebrate the sale of Carvana's millionth unit. The good news: Those who are fired get to keep the unvested portion. The bad news: It may not matter, because the shares have lost nearly 90% of their value since then. Now that's adding insult to injury. On a final note, from the mailbag... "My Inflection-O-Meter is when I finally cancel all limited buy orders after keeping lowering price points several times at the bottom and keeping raising selling price at the top." – Ning "Loved your article about inflection!" – Alain D. Herb comment: Thanks, Alain. And Ning – sounds like it works as an "inflection" indicator about as best as mine! "I have no idea what you mean when you say more shorts are showing up and they are getting respect. Are you saying that indicates another leg down, or are you saying 'we are at, or near, the bottom,' or are you simply saying look for an upward spike? Please just bottom line it. I buy and sell stocks. I buy and sell options. I avoid shorts and know nothing about shorts as indicators." – Dell S. Herb comment: Dell, what I meant was that it seems we're seeing more stories about short sellers, and they're getting quoted and appearing more often in the media. That's the bottom line. It's meant to be a contrarian indicator, and to be taken as seriously as any. See Ning's comment above! Cheers. As always, feel free to reach out via e-mail by [clicking here](mailto:feedback@empirefinancialresearch.com?subject=Feedback%20for%20Herb). And if you're on Twitter, feel free to follow me there at [@herbgreenberg](. My DMs are open. I look forward to hearing from you. Regards, Herb Greenberg July 5, 2022 If someone forwarded you this e-mail and you would like to be added to my e-mail list to receive e-mails like this every weekday, simply [sign up here](. © 2022 Empire Financial Research. All rights reserved. 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