Slowly, Slowly Catchee Monkey, Too Much Leverage Can Kill You

Apologies to Queen and their wonderful song ‘Too Much Love Will Kill You” but the phenomenon is similar. My approach to investing is that of a gambler and it has all the problems most gamblers find. Long-term investing and gambling don’t go together.

This is all about leverage. Somebody told me years ago that five times leverage is a recipe for disaster. The first 20pc fall in the value of your shares or your portfolio will wipe you out and there always will be a 20pc fall. It is a matter of time.

So how to soften my addiction so I make money? It is not easy because I am an instinctively aggressive investor. Otherwise, I am bored.

I have two ideas. One is to start with five times leverage, the maximum allowed to non-professional investors on IG. Then as the value of the shares hopefully climbs and the values become more significant I gradually allow the leverage to fall to four, then three, then two where it would stabilise.

Another idea, more aggressive in the early days but becoming progressively less aggressive would be to start with say 50 shares for a share priced around $100 and then use the leverage to add shares in blocks of 50. Over time you will be investing less compared to your total holding and your leverage will fall.

A third and probable most sensible strategy is to decide on some reasonable level of leverage, say two or three times, and stick to that throughout.

The bottom line is that my beloved five times leverage if maintained, is a recipe for inevitable disaster.

Carvana Keeps Motoring

Carvana is another stock to consider buying ahead of earnings. As explained by co-founder and CEO Ernie Garcia, this is an amazing business.

Gracia described how the used car industry is a $1 trillion industry, with roughly 40m used car transactions per year. And in the giant industry, Garcia was excited to report that Carvana had just hit roughly 1pc market share. 1pc is small, and the industry is vast. Carvana executives appear hyper-bullish about the upside from here as they change the fundamental experience of buying a used car. While a $13.41bn annual run rate this year may seem massive, they see plenty of growth from here that is realistically attainable. Garcia dives into what he thinks will get them there.

As we continue to deliver great customer experiences, we continue to make it more efficient, simpler, faster, with more selection and more customers continue to hear from friends and family that they had a great experience and that this is the new way to buy a car. We think that we’ll be able to continually penetrate deeper into different customer segments.

I mentioned earlier that the outlook is exciting. I think it’s now clear why. The company has just 1pc market share in an industry that’s ripe for disruption. Their 2025 looks highly promising because of this.

Carvana’s EPS is expected to eclipse $2.70/share by December 2025, coming in at an estimated 87.81pc YoY growth. Meanwhile, revenue is expected to reach $15.70bn by December 2025, which would be a 17.12pc YoY growth.

Carvana’s truly mobile experience is what is allowing them to steal market share. But it goes beyond just letting consumers buy cars from the comfort of their own homes.

The website has key features like a loan calculator, a 100-day, 4,189-mile “worry-free guarantee” and even a “dibs” feature, in which customers can call “dibs” on a car, and Carvana will save it for 40 minutes while the customer completes the purchasing process. Many consumers feel like the used car purchasing process is tedious, untrustworthy, and outdated. Carvana is playing to all of these emotions.

As we head into 2025, interest rates are expected to fall on the back of inflation that is leveling off. Given most car purchases are financed via auto loans, this would be a massive tailwind for the company. Used car interest rates tend to be higher than new cars. The benefit here from lower interest rates will be very pronounced.

Seeking Alpha, 13 November 2024, Noah’s Arc Capital Management

To recap, Carvana Co.’s numbers are strong and indicate that this is an entirely different company than the one that was trading as low as $4/share in late 2022. EPS and revenue figures both beat the estimated projections, the company is clearly headed in the right direction, and the company is looking at an incredible 2025.

According to Garcia, the company broke records for the most profitable quarter by a car retailer ever. That’s impressive for a firm that has just 1pc market share.

With an impressive turnaround, the company can look ahead to a market where they have a unique strategy, a more optimistic consumer, and a better outlook. I could not be more optimistic.

With this, I think Carvana Co. shares continue to be a strong buy.

Seeking Alpha, 13 November 2024, Noah’s Arc Capital Management

The shares fell sharply in December 2024 thanks to a short seller’s attack.

Carvana (NYSE:CVNA) shares remain under selling pressure and are down for a fifth consecutive day as Hindenburg’s short-seller report coupled with bearish technical indicators continues to weigh on the stock.

While Carvana (CVNA) shares were already defensive before Hindenburg’s harsh criticism of the company, the losses accelerated even as Wall Street analysts come out in defensive of the company. J.P. Morgan’s Rajat Gupta said that while there is room for improvement at the online used car retailer, his research “has not suggested any red flags,” and the current share price provided an opportunity to “buy on weakness.” Gupta maintained his Overweight rating on Carvana (CVNA).

BTIG’s Marvin Fong also found certain arguments presented by Hindenburg “unconvincing,” among those a claim that declining used car prices would translate into pressure on the company’s gross margin.

“We believe the better indicator of gross profit behavior is the spread of retail prices – what consumers are actually paying – to wholesale prices – what the used car retailer is paying to acquire vehicles,” Fong says. Using this argument, Carvana (CVNA) has realized “fatter” profits as this spread has widened.

BTIG’s Fong also addresses Hindenburg’s other arguments, including the relationship with Ally Financial (ALLY), the sale of $800m in receivables to an “unnamed party,” and prime delinquencies, all of which either contain flawed information, or are interpreted as negative when in fact could be considered a positive for Carvana (CVNA) when viewed more discriminately.

While shares have retreated by 22pc over the past five days, breaching support at the 100-day moving average, the stock is up more than 300pc from last year, outperforming the S&P 500 by more than 12x.

Seeking Alpha, 3 January 2025

These short sellers are a Wall Street phenomenon and behave dodgily. They quietly sell a share short, then publish a negative report throwing in everything but the kitchen sink as reasons to be bearish. This triggers a panic selloff. They cover their positions at a huge profit and it often turns out there is nothing wrong at all or nothing as serious as they pretend.

Many US CEOs have had furious arguments with short-sellers including those at Tesla, Shopify, Palantir and others. It is almost a rite of passage for a strongly performing share. For me, the key points about Carvana are its dynamic management, growth and profitability and the size of its opportunity.

Share Recommendations

Carvana CVNA