Summary
- Carvana Co.’s stock has already appreciated by over 300% in recent weeks.
- With an over 60% short interest, there’s a possibility that an even greater short squeeze is upon us.
- Jerome Powell’s recent dovish remarks could resurrect speculative bets and make them popular again, which could lead to Carvana Co. becoming only the first of many major short squeezes of 2023.
Carvana Co.'s (CVNA) share price has already experienced an over-300% appreciation in the last month at the time of this writing, and there are reasons to believe that we could see a further appreciation shortly. The stock continues to have over 60% short interest that could point to a potential greater short squeeze in the future. Relatively dovish remarks of Fed Chairman Jerome Powell yesterday, coupled with a release of better-than-expected earnings results of Big Tech firms such as Meta Platforms (META), have already uplifted the market and are making it possible for Carvana's stock to continue its rally. Add to this the fact that the interest in meme trades begins to resurge and it becomes obvious that the mother of all short squeezes could be upon us.
Short Squeeze of 2023?
It's no longer an anomaly when a stock of a fundamentally weak company experiences a rapid double and even triple-digit return in a matter of days. In the last couple of years, we've seen countless times when stocks of businesses that appeared on the verge of bankruptcy were able to show a much greater performance than stocks of fundamentally solid companies. However, the difference is that stocks of companies like GameStop Corp. ( GME ) and AMC Entertainment Holdings, Inc. ( AMC ) were able to grow at aggressive rates during times of expansionary monetary policy, and the fact that Carvana's share price experienced an over 300% rise at a time when central banks are engaged in a quantitative tightening is something new. Nevertheless, it seems that there's an explanation for that.
If we look closely at the chart above, we'll see that the biggest increase in price and stock volume to date happened the day after the Fed Chairman Jerome Powell made his comments about the start of the disinflationary process that could be considered a major turning point in the central bank's narrative. While Fed would continue to tame the inflation until it reaches an appropriate level, it would be doing so at a lower rate. This indicates that the worst is likely behind us and that the bearish doom-and-gloom scenarios for the market and the economy would not materialize.
As such, it's only natural for investors to begin once again flooding the markets with cash to avoid the fear of missing out on profitable ideas in this new environment while the Fed begins to provide more dovish remarks after a year of hawkishness. Add to this the fact that Big Tech has also beat the street estimates for Q4 and guided for a decent performance in 2023, while speculative assets such as crypto are making a comeback, and it becomes obvious that Carvana's recent appreciation after Jerome Powell's talk is not that big of a surprise.
What makes Carvana's situation different, though, is that its stock is not appreciating due to solid fundamentals, like, for instance, the stock of Meta Platforms, which has appreciated by ~30% in a single day. As was the case with other popular meme trades of previous years, Carvana has experienced a major depreciation of value in the last year that wiped out almost all of its market capitalization, as its business wasn't able to adapt to the changing market environment due to the leveraged nature of its model.
However, as its stock was rapidly declining, AMC Entertainment Holdings, Inc. attracted a significant amount of short sellers that were able to make a decent profit on the ride down from over $200 per Carvana's share at the beginning of 2022 to less than $10 per share only a week ago. What's also interesting is that, as we've witnessed a rebound from 52-week lows recently and an over-300% appreciation in the last month, the latest data shows that there's still a 65% short interest in the stock. This indicates that short sellers are still heavily betting on the decline of Carvana's stock.
As a result, there's a case to be made that we could witness a greater short squeeze than the one that has happened in recent days, since the short interest remains significant while the market environment begins to change. Carvana's stock already has a record daily volume at the time of this writing as more people join the trade and the company becomes one of the most discussed names on famous online boards such as Reddit's /WallStreetBets.
Does it guarantee that a greater short squeeze is definitely in play? No. There's never certainty with such stocks. Let's not forget that Carvana is a fundamentally broken company with an excessive level of debt and could be on its way to bankruptcy, which for some could make it hard to even justify the street's consensus price target of $10.69 per its stock.
However, the examples of the past have proven that even stocks of companies that seem on the brink of bankruptcy can deliver double and triple-digit returns if the market environment permits. Jerome Powell's recent dovish remarks could resurrect speculative bets and make them popular again, which could lead to Carvana Co. becoming only the first of many major short squeezes of 2023.
For further details see:
Carvana: Mother Of All Short Squeezes Could Be Upon Us