CarMax Stock (NYSE:KMX): The Intrepid Contrarian’s Smart Speculation

By intuition, used-car dealership stock CarMax (NYSE:KMX) seems a terrible idea because of major headwinds rocking the consumer economy. However, burgeoning relevancies should make the auto retailer the intrepid contrarian’s smart speculation opportunity. Therefore, I am bullish on KMX stock.

Admittedly, the very concept of acquiring KMX stock runs anathema to those concerned about losing money, particularly through bag-holding. True, shares blossomed so far this year, gaining over 35% since the January opener. For context, the benchmark S&P 500 Index (SPX) gained around 15% during the same period. However, KMX is also down almost 13% in the past year. Nevertheless, it’s only silly on paper.

No, KMX stock isn’t devoid of risk, nor should prospective investors ignore the fundamental challenges affecting CarMax. Predominantly, inflation – though in line with the most recent expectations – remains incredibly elevated against pre-pandemic norms. Further, the Federal Reserve’s efforts to curb said inflation through interest rate hikes poses backend affordability problems for consumers.

Beyond the possibility of more rate hikes, the unemployment rate ticked higher to 3.7% in May. Combined with mass layoffs at major corporations, fewer people presumably have ultra-high-paying jobs. While these factors are concerning, the broader return-to-the-office pivot could sustain the rally in KMX stock.

It’s not just that employers don’t trust their employees at scale, though this is a major problem. A 2014 Salary.com survey revealed that 89% of workers admitted to wasting time every day in the office. Also, a 2019 American Management Association revealed that the average worker wastes more than two hours a day on the clock. Rather, employers are catching remote work abusers red-handed.

One Canadian accountant was ordered to pay back her employer for “time theft” earlier this year. Also, in March, a story broke that a New York legal firm sued one of its lawyers for “working” remotely while pursuing an unrelated endeavor.

Finally, with an ExpressVPN survey revealing that 42% of Americans watched “mature” content on their work computer, the jig may be up.

By logical deduction, the increased skepticism that employers have started demonstrating regarding the actual productivity of remote work should eventually lead to the return of the morning (and afternoon) commute. Subsequently, recalled worker bees will need reliable transportation, and that’s where CarMax offers a sensible service.

For one thing, CarMax offers a massive advantage over the likes of online auto retailers such as Carvana (NYSE:CVNA). With society no longer fearing the COVID-19 pandemic, consumers can skip out on online delivery conveniences and save themselves a few bucks by going to physical dealerships.

More significantly, CarMax’s extended warranty offer should be a game-changer for KMX stock. Every car that the company sells comes with a 90-day or 4,000-mile limited warranty (whichever comes first). However, customers can also elect to purchase MaxCare, which is essentially an extended warranty that lasts up to five years or 150,000 miles (again, whichever comes first).

Yes, it makes the vehicle more expensive to purchase, obviously, and there’s always a possibility that you won’t need it. However, with an increasing number of workers being recalled, the reintroduction of commuting could impose significant wear and tear. Therefore, the extended warranty may provide peace of mind.

Undeniably, the present financial picture for CarMax doesn’t the biggest source of encouragement. Contrarians will have to look ahead to brighter times.

For instance, the company’s revenue profile leaves much to be desired. In the quarter ended February 2023, CarMax posted sales of $5.72 billion, down almost 26% against the year-ago level’s $7.69 billion.

At the same time, though, net income in the most recent quarter clocked in at $687.01 million, up nearly 330% from the year-ago quarter. Also, it’s worth pointing out that KMX stock trades at 0.49 times trailing-12-month sales. In contrast, the automotive sector’s average price-to-sales ratio comes in at 0.59 times. So, contrarians may still be getting a deal despite KMX’s rise this year.

Turning to Wall Street’s top analysts, KMX stock has a Moderate Buy consensus rating based on three Buys, four Holds, and two Sell ratings. The average KMX stock price target is $72.13, implying 12.5% downside risk.

At the moment, KMX stock seems a risky idea because of legitimate consumer economy concerns. However, shares may not have priced in growing employer skepticism regarding remote worker productivity. Subsequently, the full return of the commute could spark demand for reliable transportation, fortuitously benefiting CarMax.

Disclosure