Short selling data can be a very effective risk management tool. If a stock has a high level of short interest, it indicates that hedge funds and other sophisticated investors expect it to fall.
In this report, we are going to look at the short interest data on Carvana Co (CVNA:US). Carvana operates an e-commerce platform for buying used cars. Through its platform, consumers can research and identify vehicles, inspect them using its 360-degree vehicle imaging technology, obtain financing and warranty coverage, purchase vehicles, and schedule delivery or pick-up, all from their desktop or mobile devices. The company is listed on the New York Stock Exchange and currently has a market cap of $4.8 billion.
Carvana: Short Interest Data
Analyzing the short selling data on Carvana, we see two major red flags at present.
The first is that short interest is high. Right now, 27.28.0 million shares are on loan, which represents 27.44% of the free float. This tells us that there is a high level of bearish sentiment towards the stock within the hedge fund community.
The second red flag is that the number of shares on loan has spiked since the start of June. At the beginning of June, just 7.2 million shares were on loan here. Today, the figure is roughly 300% higher. This sharp increase is a concern, in our view. Research shows that sharp rises in short interest tend to be followed by periods of underperformance.
Why are Short Sellers ramping up their downside bets on Carvana?
As for why the short sellers are ramping up their bets here, it could be related to deteriorating trends in the used vehicle industry. In May, Carvana said it would lay off about 2,500 employees (12% of its workforce) and cut marketing and capital spending, after reporting a sequential decline in retail units sold in Q1.
It could also be related to the company’s balance sheet. Recently, Stifel slashed its price target for Carvana stating that deteriorating capital market conditions have eroded its conviction in the path for the company to secure the necessary capital to realize sufficient scale and self-funding status.
A lack of probability could also be an issue that the short sellers are focusing on. In Q1, the company posted a much larger loss than expected (-$2.89 per share vs the consensus forecast of -$1.44). It’s worth noting here that the group’s gross margin is very low. Last year, it was just 15%. This is not ideal in an inflationary environment.
Whatever it is the short sellers are focused on here, we think caution is warranted towards the stock. The sharp rise in short interest is a red flag, in our view.