CarMax (NYSE: KMX), an expert in used automobiles and a colleague of AutoNation (NYSE: AN), is up today nearly 14% in early-afternoon trading on spectacular volume. What's driving (pun intended!) the buying action? You guessed it...earnings. Revenues for the first quarter decreased 17%. Adjusting for items, CarMax earned $0.22 per share, and, according to my colleague Melly Alazraki, that figure simply annihilated earnings projections developed by the analysts.
Well, well, well...what to do now, right? CarMax is an interesting company in an interesting time. It sells used cars during a period when new cars aren't selling too well. We all know about the problems at Ford (NYSE: F) and General Motors (OTC: GMGMQ). But that isn't reason enough to put money down on this stock. Especially not after a rally like we're seeing today.
The market did the same thing during the last earnings announcement. It sent shares of CarMax higher. When I discussed the company at that time, I just came out and admitted that I simply couldn't buy the stock. Now, we had a similar situation: a bottom-line beat in conjunction with some bad numbers. That made me think that buying CarMax on an excited tape might lead to bad-timing heartache.
The stock did pull back for a brief period, then it rose again, only to be followed by another decline. After that, the stock rallied yet again along with the market. It's been strong lately, and pretty volatile all along. You can check out a three-month chart at AOL quotes to get the story.
I'll have to say it again: CarMax probably should be avoided considering the earnings-report euphoria. From a trading perspective, you could argue that the news is out and that the trade is possibly over. From an investing perspective, you could argue that, earnings-beat or not, the economy is still bad, CarMax's numbers are bad, and the bullish sentiment on Wall Street needs a correction in a bad way. Now just may not be the time to be in CarMax. You can always take a look at the stock after it gives up some of its recent gains...
Disclosure: I don't own any company mentioned; positions can change without notice.
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Reader Comments (Page 1 of 1)
6-20-2009 @ 12:03PM
jim_hillmeyer said...
No, Steve:
What "problems" with Ford (F)? You must have meant Chrysler, along with GM.
Ford is doing just fine(F). Watch and see what happens!