Making for an odd dynamic, the benchmark S&P 500 index slipped roughly 1% in the early afternoon session while deeply embattled Carvana (NYSE:CVNA) swung higher to the tune of 9% at one point today. Recently, rumors swirled about the used-car retail and delivery service’s eventual bankruptcy. However, better-than-expected data of the secondhand market bolstered CVNA stock.
Earlier today, Manheim — a data information provider specializing in previously owned vehicle sales — released its used vehicle value index reading for January, per a Barron’s report. Coming in at 224.8 in January, this figure represented a 2.5% lift from December’s reading of 219.3. Notably, it’s the second consecutive monthly increase.
As Barron’s remarked, heading into the December boost, used-car values declined for six consecutive months and nine out of the past 10. Fundamentally, the price hike stems from rising volumes, with January seeing a 16% sales lift of used vehicles. Along with CVNA stock, AutoNation (NYSE:AN) enjoyed a half-a-percent lift.
However, another factor that drove demand higher centered on the coronavirus pandemic. While Covid-19 no longer represents a current excuse for underperformance, many industries still suffer from its aftershocks. Specific to CVNA stock and the used-car segment, consumers prefer buying three-year-old vehicles. Per Barron’s, this age represents a “sweet spot” — such cars depreciated by about 40% and may still have warranty coverage.
Unfortunately, the Covid disruption meant that in 2020, new car sales dipped by 15%. Therefore, fewer three-year-old used cars exist in the secondhand market today, creating a supply-demand adjustment upward.
The ‘Christmas Tree’ Effect Bolsters CVNA Stock
Similar to the bullwhip effect, the fortuitous rise of CVNA stock isn’t the first time that past events carried forward future consequences. Indeed, the winter holiday seasons throughout the new normal became less joyful due to the 2008 financial crisis.
According to Modern Farmer, the namesake industry was “hit hard by the Great Recession. And growers of Christmas trees were under extra pressure, forced to forecast more than a decade out, rather than a single season.” Typically, farms focusing on such fir trees run on a 10-year cycle.
Cynically, then, stakeholders of CVNA stock may point to Covid-19 as the “gift” that keeps on giving. In July 2020, the Wall Street Journal reported that quarantining New Yorkers bought their first ever car. While the Big Apple commands an extensive public transportation network, at the time, privacy commanded a premium.
Further, Carvana offered a near-complete social-distancing protocol, enabling end-to-end services without customers leaving their living rooms. Sure enough, CVNA stock skyrocketed to impressive heights until it peaked in August 2021.
As well, Carvana may be receiving help from short-squeeze speculators. Currently, Fintel reports that the short interest of CVNA stock reached 65.43% of its float. As well, Fintel’s proprietary Short Squeeze Score pings at 88.59 out of 100. Higher numbers indicate greater probabilities of a short squeeze materializing.
Why It Matters
According to another Wall Street Journal article in 2022, the average age of vehicles on U.S. roadways hit a record 12.2 years. However, TrueCar Chief Analyst Eric Lyman noted that “[t]he average lifespan [of a car] is now almost 12 years.”
If that’s true, many vehicles are now approaching their replacement-age threshold. While it’s not an exclusive benefit for CVNA stock, it certainly doesn’t hurt. And Carvana could use all the help that it can get.
On the date of publication, Josh Enomoto 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 InvestorPlace.com Publishing Guidelines.