Money

Can CarMax Fuel Your Portfolio?

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Back in September, I looked at shares of used-car seller Carvana Co. (NYSE: CVNA).

This once red-hot stock had been beaten up. From their peak, Carvana shares had dropped a staggering 91%!

Many investors were wondering whether the market had overcorrected and that perhaps Carvana stock had become a bargain…

My opinion at the time was that it HAD NOT!

In fact, I called this used-car stock a lemon.

I did not like that the company was burning through cash and was laden with debt. Debt and no cash flow is a combination that does not mix.

Since then, Carvana shares have dropped another 75%.

Carvana Shares Drive Off a Cliff

I still see no value here and would recommend staying away.

The Value Meter retains its “Extremely Overvalued” rating on Carvana.

But if you’re still looking for a bargain in the used-car industry, then keep reading.

A Used-Car Stock You Can Trust

Used-car salesmen don’t have the best reputation. But used-car retailer CarMax (NYSE: KMX) is trying to kick that perception to the curb.

Originally operating as part of Circuit City, the first CarMax retail location opened in September 1993 in Richmond, Virginia.

By 2002, CarMax was a completely independent, publicly traded company.

And just look at how the stock has performed since then!

A $10,000 investment in CarMax at the time the stock went public is now worth $272,400.

A $10,000 investment in the S&P 500 at the same time is worth $49,210.

This used-car stock has performed like a high-quality automobile!

Carmax is Off to the Races

For CarMax, size is a huge advantage. The company operates more than 200 dealerships across the country.

This allows it to offer the largest selection of cars by far. And because the company is so big and can purchase cars from everywhere, CarMax gets much better pricing than competitors do when stocking its used-car inventory.

Lower input costs make for fatter profit margins.

The long-term driver of CarMax’s stock price has been an annualized rate of double-digit earnings growth.

Earnings haven’t gone up every single year, but over time, the annual average has been impressive.

Carmax Earnings per Share Growth

When you grow earnings per share at that rate for a couple of decades, shareholders are going to be extremely well rewarded.

Now, last year was not a banner year for CarMax.

Earnings declined from the prior year, as the used-car boom that happened during the pandemic subsided.

As a result, CarMax shares have come down.

But this is the kind of quality company that you should want to own if the valuation is right.

This year, the consensus analyst estimate is that CarMax is going to earn $2.86 per share.

With the current trading price of $68, that means CarMax trades at a price-to-earnings multiple of just under 24.

That’s reasonable for a company with a quality long-term track record of growth.

But it’s not a great deal.

I recommend sticking CarMax on your watchlist and waiting for the sticker price to come down to under 20 times earnings.

That would be a better entry point.

The Value Meter rates CarMax as “Appropriately Valued.”

Value Meter

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