What happened
Shares of online used car dealer Carvana (CVNA 8.79%) spiked on Thursday, rising about 12% as of 1 p.m. ET.
Carvana is a controversial stock with very high short interest, which can make for outsized moves both to the upside and downside, even at only mildly impactful news.
That appears to be happening today, as a few indirect news items around August retail sales and a looming United Auto Workers union strike may be causing shorts to cover.
So what
Carvana wasn't the only used car dealer stock to rise today as its publicly traded competitors such as CarMax and Vroom also made moves to the upside.
The used car sector was likely helped by two news items. First, August retail sales data came in stronger than expected today. Economists may have suspected some softening in spending for the U.S. consumer given the rapid rise in interest rates, but August sales showed a 0.6% rise in spending relative to the previous month, far above analyst estimates of 0.1%. Excluding gas, which rose during August, spending was still up 0.2%, higher than the expected 0.1% month-over-month decline.
In particular, auto dealer sales showed month-over-month and year-over-year growth, with just over $130 billion in sales relative to the $124 to $125 billion in sales in July 2023 and August 2022.
In addition to positive reported car sales, investors may also be more bullish on used cars due to the looming UAW strike. The strike will happen tonight for all major unionized U.S. car companies at 11:59 p.m. if no deal is reached. The thinking here may be if new cars aren't available or go up in price, consumers will pivot to used cars. Used car prices would also go up in that scenario too, but they tend to be more affordable than new models.
Now what
Carvana has a stunning 30.5% of shares outstanding sold short, which accounts for 45.5% of its publicly traded float. Therefore, any positive news, even marginal, can send the stock soaring as shorts cover or lighten up their positions. That appears to be what we are seeing today.
However, Carvana still has serious problems despite its recent stock surge. That surge came on the back of the company completing a debt exchange with some of its creditors, which lowered near-term interest payments and overall debt, albeit at some dilution to shareholders. In fact, earlier this week, S&P Global only slightly upgraded Carvana's debt rating, from a lowly D to a CCC- rating.
But before anyone gets too excited, the upgrade appears to be based on the near-term relief the debt exchange brought, with a still-ominous, long-term outlook. The S&P analysts still called Carvana's debt load "unsustainable," with the need for Carvana's profits to materially improve before 2026 when its payment-in-kind interest payments revert to cash payments.
So despite the good news today, Carvana is an extremely risky stock at these levels.
