CarMax (KMX) May Be a Surprising Bet for Bullish Contrarians

By practically every measure, used-car dealership CarMax (KMX) represents an easy name to sell. From technical indicators to market performance to fading revenue, KMX stock simply looks ugly. Tack on macroeconomic headwinds – particularly the prospect of rising interest rates – and the investment seems pointless. However, those who are bold contrarians may want to keep shares on their radar.

First, let’s get the bad news out of the way. While the secondhand vehicle market saw a massive lift through the roughly first two years of the new normal, circumstances started to sour this year. As a result, CarMax produced less-than-desirable quarterly earnings reports. For instance, in the quarters ending February and August of this year, the negative earnings surprise amounted to 23.44% and 43.57%, respectively.

At time of writing, there are less than 24 hours before CarMax releases its Q3 results for its fiscal year 2023. Analysts anticipate that the company’s earnings per share will drop 60% to 65 cents. In addition, experts forecast that revenue will decline by approximately 16% to $7.2 billion. Again, by most measures, conservative investors may want to steer clear of KMX stock.

Further, fears of a global recession dominate headlines. In particular, the Federal Reserve imposes a vexing problem for investors. With the central bank committed to tackling skyrocketing inflation through raising the benchmark interest rate, the subsequent rise in borrowing costs will surely stymie consumption. It goes without saying that this dynamic imparts a massive headwind against KMX stock.

Still, it’s important to realize that purchasing cars doesn’t exclusively represent a discretionary purchase. Sure, some folks buy luxury automobiles that serve very few practical purposes. Arguably, though, the vast majority of households buy cars fundamentally because they need them.

According to Statista.com, 76% of Americans use their own vehicles to commute to work. And because cars break down over time, collectively, they will require replacement. That’s one positive for KMX stock that investors shouldn’t outright ignore.

KMX Stock Becomes a Focus of Unusual Options Activity

With CarMax set to release its Q3 report shortly, it wasn’t a surprise that options traders have been busy targeting KMX stock. A few days ago, investors purchased 22,033 put options on the company. Per MarketBeat.com, this figure represented an increase of 306% compared to the typical volume of 5,431 put options.

In addition, after the close of the Dec. 21 session, KMX stock lit up Barchart.com’s screener for unusual stock options volume. This metric shows the difference between the current volume and the average volume over the past month. Usually, traders advantage this information to determine which stocks may be due for big moves ahead.

Specifically, KMX’s volume level reached 84,745 contracts against an open interest reading of 134,283. Against the trailing one-month average, volume for the day spiked up 591.23%. Call volume hit 46,921 contracts versus put volume of 37,824. The implied volatility (IV) rank hit 89.39%, which indicates the (at the money) average IV relative to the highest and lowest values over the trailing one-year period.

To summarize, IV signifies the expected volatility of a stock over the life of an option. As certain influencing factors for the underlying investment changes, the IV will likely change as well. Further, as demand for an option increases, so too will its IV.

The IV low for KMX stock was 26.94% on Dec. 31, 2021. Almost a year later on Dec. 19, KMX hit its IV high of 81.63%. Prospective investors should note that per Barchart.com’s technical analysis gauge, KMX ranks as an average 88% sell. Decisively, the stock’s medium term and long-term indicators point toward a bearish outcome.

Still, analysts maintain a bullish outlook on KMX stock. Three months ago, Wall Street experts pegged CarMax as a “moderate buy,” broken down as five strong buys, two moderate buys, five holds and one moderate sell. In the current month, the overall assessment and individual breakdown remain exactly the same.

Why the Positive Outlook for CarMax?

Although both internal and external factors suggest that KMX stock will disappoint in the months ahead, quite a few experts hold out hope that the underlying business can recover. Could retail investors be missing some important signs?

To be fair, KMX stock doesn’t represent a confident contrarian play. However, it’s important to recognize that the COVID-19 crisis created unique work-life paradigm shifts. But the issue is that these shifts may not last indefinitely. As normalization trends ramp up, employers could recall their employees back to the office.

Of course, some workers quit their jobs because they refused to go back to their cubicles. More than likely, most will not. Frankly, to quit one’s job amid major enterprises slashing their headcounts is categorically imbecilic. Unless one was planning on starting their own business, quitting on the basis of an employer resuming normal operations reeks of entitlement.

As well, it would be difficult to explain the underlying resume/CV timeline gap – particularly if said person bragged about it on social media.

Therefore, with workplace norms returning, traffic levels should rise to pre-pandemic levels, if not higher. As well, those with jobs that became remote will soon realize that a mass of college graduates will enter the workforce. Naturally, competition will be fierce for the declining number of opportunities, thus potentially eliminating work-from-home privileges.

Over time, this trend translates to higher traffic volume and higher usage of vehicles. And that ultimately makes KMX stock an intriguing opportunity for contrarians.

• Stocks Rally as Positive Corporate Earnings Boost Market Sentiment
• The Short End of the Yield Curve is Due for Higher Rates
• FOMC Committee Rotation to Become More Dovish Next Year
• Stocks Higher on Positive Corporate Earnings