Newsflow Is Always Good When Stocks Are Enjoying A Moment In The Sun

Carvana has been one of my most successful recommendations with the shares up 23.5 times since they were recommended at $10.84 in 2023.

The thing that excited me about Carvana was its similarities with a UK company, Ashtead, which has also been a successful stock for QV.

The scale for Ashtead is longer with each candlestick covering a year’s trading but it shows a remarkable recovery from a deep low point. Like Carvana more recently investors feared that Ashtead had scaled its business and taken on large amounts of debt just before a drastic deterioration in trading conditions. In both cases, management realised they were fighting for survival and took drastic steps accordingly.

This discipline then stood them in good stead when conditions improved. As we can see with Ashtead, what began as a sharp recovery ended with a massive bull market in the shares. Ashtead’s main business is Sunbelt Rentals, an equipment rental operation in the USA, which is the second largest in the sector after United Rentals. Sunbelt Rentals is trading well and is in the QV portfolio.

Looking at this chart I would say that the shares are a buy.

Shares often turn on a sixpence (whatever that is, as a zillionaire named Gulbenkian famously said when talking about his Rolls-Royce) and head higher as fast as they fell in what chartists call V-shaped reversals. Such reversals often don’t stop when the previous peaks are reclaimed but go on to make new highs as Ashtead has done and I expect Carvana to do.

Newsflow has much to do with this dramatic behaviour. On the way down all the news is bad and management becomes increasingly shell-shocked. Then they do the whole ‘be a man thing’, react decisively to their problems and from then on all the news is good. It makes sense that share prices will reach their nadir when prospects look grimmest, so even survival news becomes good news.

Carvana is unusual in that it has an extraordinarily talented team, all Harvard and Stanford graduates, applying their massive smarts to the mundane business of selling used cars. Unsurprisingly, they are running rings around the existing Steptoe and Son incumbents of the business.

Used cars are big business, especially in the car-mad USA.

The used car market in the United States was valued at $201.2bn in 2022, and is projected to grow to $402.1bn by 2032. 

AI overview, Google

Against these massive figures Carvana is just getting started.

We had record performance in virtually every key financial measure. Our net income in the third quarter was $148m, leading to a net income margin of 4.0pc. Our operating income was $337m. And our Adjusted EBITDA was $429m. This translates to an 11.7pc adjusted EBITDA margin. And these profitability records have to be viewed in a very important context: they were achieved while growing
at 34pc year-over-year by a company that currently has just 1pc market share. The machine we have built is fundamentally differentiated and the result is an opportunity with few precedents. Most importantly, our customer experiences, our financial performance, and our pace of growth continue to separate us further from the pack in our industry. Today, we are the most profitable and fastest-growing automotive retailer and there is still much more to do.

Carvana, shareholders’ letter, Q3 2024, 30 October 2024

These Stanford and Harvard guys have huge ambitions.

And while we are already the second largest used automotive retailer in the country, we are only a small fraction of what we can ultimately become. The pieces are all in place. We are a team that knows how to build. We have an offering customers love. We have a uniquely profitable and highly scalable business model. And we have already built, acquired, and invested in the most complex and expensive parts of the infrastructure necessary to be many multiples larger than we are today. Our existing reconditioning infrastructure can support annual production capacity of over 1m retail units and our real estate footprint can support annual production capacity of over 3m retail units. The future is bright.

Carvana, shareholders’ letter, Q3 2024, 30 October 2024

You could say, without hyperbole, that Carvana is the Tesla of the US used car business.

If you are looking for early stage recovery plays there are two more which look interesting.

As you can see I have already tipped Peloton for recovery and that is not going well so far. The big ‘something new’ at Peloton is a new management team. On 31 October 2024 Peloton appointed Peter Stern as the new CEO.

The Peloton Board conducted a comprehensive search to identify Peloton’s next leader who:

Appreciates and loves Peloton’s products and services. Mr. Stern has been a Peloton Member since 2016, and an early adopter of both the Bike and Tread. He works hard to stay fit by making the right choices about his health every day, and Peloton classes are a critical part of his routine.

Understands the Company’s challenges and opportunities. Peloton brings together expert instruction and world class content to create impactful and entertaining workout experiences to enhance Members’ lives. Mr. Stern has spent over 20 years operating at the nexus of hardware, software, content and services at Ford, Apple and Time Warner Cable.

Is passionate about helping people meet their fitness goals. As the co-founder of Apple Fitness+, Mr. Stern led its growth to millions of members. He brings the energy of a founder with the experience of a veteran.

Can operate a complex, subscription-based business. Mr. Stern has grown over a dozen different subscription businesses, ranging from Apple iCloud to Time Warner Cable Home Security to Ford BlueCruise, hands-free highway driving technology.

Is a product innovator and strategist. Mr. Stern brings creativity to strategic thinking. He has been awarded over 30 patents (including a foundational patent in online media content, TV Everywhere), led strategy for companies navigating critical transitions and founded multiple businesses.

Recognizes that, at the end, it’s all about people. As a former Chief People Officer, and the son of a fitness instructor, Mr. Stern has deep empathy for Peloton’s team members and its devoted community of Members.

Peleton website, news, 31 October 2024

New CEOs at struggling companies are like new governments, anxious to emphasize all the bad stuff that was happening before they arrived, so the initial newsflow may not be great. As it happens the first report from Peloton under Stern’s leadership looks promising.

We had a strong Q1 FY25 and performed above our guidance on all of our key metrics. We’re especially
pleased with our bottom line results and Free Cash Flow – we’re achieving our cost savings targets faster than we expected as a result of strong execution by our talented Peloton team members. We remain hard at work and on track to achieve the goals we set for FY25, which include:

Aligning our cost structure to the current size of our business, by delivering over $200 million of run-rate cost savings bythe end of fiscal year 2025 from our cost restructuring plan announced in May 2024.

Improving our unit economics across all products, sales channels and markets, in pursuit of profitable growth and meaningful free cash flow generation.

Continuing to make strategic investments in innovation to enable Peloton to return to top-line growth. This includes product development in both software and hardware features, refining our marketing strategy to efficiently attract new audiences, as well as evolving our content offering to deliver more diversified, engaging fitness experiences.

Peloton, shareholders letter, Q1 2025 31 October 2024

Below is a sample of action being taken to build the business.

As part of Peloton’s evolving go-to-market strategy, the company is taking a more balanced marketing approach to how it creates demand among new audiences. Today, two-thirds of Peloton Members are women, which provides an opportunity for the company to attract more men to the platform by using targeted messaging that resonates with their fitness needs.

“Our brand research has shown that more than 70 percent of millennial males engage with running, but many in that same audience set are either not aware of our Tread and running offerings or are unsure if we’ll deliver a challenging enough fitness experience for them,” said Lauren Weinberg, Peloton Chief Marketing Officer. “Enter T.J. and J.J. Watt, Peloton Members who already compete against each other on the Peloton Leaderboard. Partnering with them is an organic way to counter these misperceptions by showcasing that we have challenging workout options that are hard enough, even for elite athletes.”

Motivation has long been an important part of the Peloton experience, but Find your push. Find your power. taps into a deeper human power that energizes people to stay on track with their fitness routines. Produced in partnership with creative agency Special London, the first phase of the campaign demonstrates how sibling rivalry fuels both T.J. and J.J. to push harder in their workouts, competing against each other across many different fitness disciplines on the Peloton Leaderboard. The brothers rotate through various workouts, including running on the Peloton Tread, cycling on the Peloton Bike, and doing strength training and yoga with the Peloton App. Regardless of the activity, the innate competitive nature of the brothers pushes them to their maximum effort.

Peloton news release, 1 November 2024

Peloton is all about the convenience of home fitness for people who may be too busy to go to the gym. My son-in-law has a Peloton bike and I hear him pounding away when I am in my Saffron Walden mansion. The music alone is a serious workout.

I can imagine home fitness being big business as more people work from home with mostly sedentary lifestyles. A reborn Peloton could be a star performer although this journey has just begun.

Another share I feel could have reached a nadir is Super Micro Computing which has been having problems with its accountants, who left and meeting the listing requirements of the NASDAQ because of delays in posting its accounts. Investors hate this and the shares have collapsed with additional worries that their customers may take fright.

What is missing on this chart is a buy signal. The idea here would be to make a pilot buy and then add to the position on a buy signal. The temptation is because SMCI has the makings of a great business in a great sector. The company is expected to have sales of $25bn in the year to 30 June 2025. That may be too optimistic if the customers disappear but it highlights the appreciation potential for a business which is valued at $20bn.

Warren Buffett said once that buying shares in a public company was like going into partnership with a manic depressive. I increasingly think investors, probably including me, are completely mad. A man called Charles MacKay wrote a famous book about it entitled ‘Popular Delusions and the Madness of Crowds’. He was thinking especially of things like the South Sea Bubble, the Tulip Mania in 17th century Holland and the Railway Mania in Victorian England.

I have lived through two such manias. The first was the Poseidon boom in the early 197s when Australian mining shares routinely doubled overnight after announcing the discovery of trace elements of some mineral in the Australian Outback. The second was the Internet Bubble in the late 1990s. I remember coming back on the plane from Uruguay, opening the Financial Times, and discovering that I had made £1m in a day. Crazy times!

My penchant for shares exhibiting explosive momentum means that I am continually caught up in mini-manias. In 2024 alone I have made and lost fortunes in Super Micro Computer, Microstrategy and ICZoom. Bear in mind that I am more like a poker player than an investor. I am one of the crazies.

I have a golden rule. When I think I am doing really well I should sell. I break it every time. Do what I say, not what I do. I was holding Microstrategy the other day when they topped $550 and were screamingly overbought. Did I sell? No, although I still came out with a profit as I usually do.

Unfortunately, I have noticed that I am a thrill seeker, never happier than when I am betting the ranch on some wild momentum play. If I could just lower the bar and invest for steady above-average returns I would make a fortune, like taking candy from a baby, given how many outstanding growth stocks are quoted in the US and the power of the booming USA economy. I try but inevitably I become bored, all those safe growth shares are dumped and I am chasing rockets yet again.

Share Recommendations (28 November)

Carvana CVNA

Ashtead. AHT

Peloton Interactive. PTON

Super Micro Computer SMCI