Following a tough outing for its first-quarter earnings, new and used car dealership Lithia Motors (NYSE:LAD) saw its shares stumble more than 6% on Wednesday. However, ongoing economic challenges suggest that LAD stock could suffer from even more downside price action.
Lithia reported Q1 profit of $162.6 million. On an adjusted basis, earnings came out to $6.11 per share. Unfortunately, this figure missed Wall Street’s consensus target of $7.85 per share. On the top line, the auto dealership generated sales of $8.56 billion. Here, the company managed to beat the consensus view of $8.51 billion.
Still, investors didn’t appreciate the gross profit per vehicle dropping 22% to $4,346 last quarter. Subsequently, investors abandoned LAD stock. Notably, CarMax (NYSE:KMX) – which only specializes in used vehicles – gained almost 1% on Wednesday.
Consumers are struggling under the weight of high inflation and high interest rates. Indeed, some signs have emerged that high borrowing costs are impeding sales of high-priced electric vehicles. So, if higher-income consumers are struggling, that presents a discouraging backdrop for everyone else.
Technical Posture Shifts Negatively
At the moment, analysts rate LAD stock as a moderate buy. This assessment breaks down as four buys, three holds and one sell. Further, the average price target of $310.14 implies about 25% upside potential. Naturally, there is a risk in going short Lithia Motors.
On the other hand, technical indicators point to LAD stock representing a strong sell. That’s not just in response to the Q1 earnings miss. Rather, since shooting up in late December 2023, LAD stock has struggled for traction. The latest financial disclosure simply emphasized the wider challenges.
Trade of the Day: Buy LAD Stock Put Options
For the trade of the day, risk-tolerant speculators may want to consider the 17 May 2024 $240 put. This out-of-money (OTM) option anticipates continued downside price action over the next several days. However, there is an important caveat.
After a sharp drop in value, it’s not unusual for a security to pop back up – the so-called dead-cat bounce. According to Barchart, strong resistance comes into play at around $266. Traders should wait to see if the bulls will push LAD stock to this level on Thursday. If LAD struggles to move past this point, the $240 put would be very tempting.
For one thing, the premium on the put should be cheaper. The bears appear to have control of LAD stock, so a failure to breach an important resistance barrier would embolden the pessimists. Finally, the fundamentals of the broader automotive market don’t look enticing, with only a few players like Toyota (NYSE:TM) moving against the grain.
Sadly, LAD stock doesn’t appear to be one of those select entities. Therefore, the bearish argument is an enticing one for swing traders.
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.
