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Investors Agree This Company Could Deliver

Investors Agree This Company Could Deliver

stock and bond growth


Different investors have different perspectives. An income investor will often focus on safety while an investor in the stock market might focus on growth. The primary investment objective can determine the value of the company.

While it is possible to find investments that combine safety and growth, both factors are not always available in the same company. But, occasionally a company can combine both.

That appears to be the case with Carvana Co. (NYSE: CVNA).

Carvana is an e-commerce platform for buying used cars. On the company’s platform, consumers can research and identify a vehicle, inspect it using its proprietary 360-degree vehicle imaging technology, obtain financing and warranty coverage, purchase the vehicle and schedule delivery or pick-up, all from their desktop or mobile devices.

The company’s transaction technologies and online platform transform a traditionally time consuming process by allowing customers to secure financing, complete a purchase and schedule delivery online.

Growth Is Important to the Company

As a start up, growth in revenue is important to consider. The company’s first publicly available financial statement is for the 12 months ending in December 2014. Sales for that period were $41.7 million.

Over the most recent twelve months, the company reported sales of $1.3 billion, more than 30 times more than they were just four years ago. This type of growth has been recognized by traders in the stock market.

CVNA daily chart

The company is not profitable yet, but analysts expect earnings to turn positive in 2020.

Profits assume that growth will continue and the company recently reported news that indicates growth is likely.

The Memphis Business Journal reported, Carvana, the fast-growing nationwide used car dealer, is set to build a Memphis version of one of the car-vending machines that have helped make the company famous.

A $5 million building permit was filed for the project on Friday.

The Memphis machine is set to be 75-feet tall and located just north of Interstate 40 at 7201 Appling Farms Parkway, about half a mile west of Main Event Entertainment.

Despite the vending-machine motif, customers won’t buy cars at the site; the Phoenix-based company sells all of its vehicles online. Vehicles are then delivered to customers’ doors or sent to the nearest vending machine to be picked up.

The facility will join 12 other car vending machines that Carvana has built since 2015. In early August, the company announced revenue growth of 127 percent, despite continued net losses. It is a spinoff of the used-car giant DriveTime.

Fixed Income Investors Also Spot Potential

There are a number of factors investors in the fixed income market consider in addition to the factors that equity investors consider. Among those factors is the bond rating.

Moody’s assigned a first time B3 Corporate Family Rating to Carvana and a Caa2 rating was assigned to the company’s proposed $300 million senior unsecured notes issue.

“Carvana’s unique online used car retail model is in its early stages, with no profits as of yet, however Moody’s feels that performance thus far reflects a certain level of resonance with the used car buying public, with the potential for quarterly profitability within the next two years, and results from early entered markets encouraging on that front,” stated Moody’s Vice President Charlie O’Shea.

This could explain the stock’s longer term trend which has been up for some time.

CVNA weekly chart

Trading the Trend in CVNA

When a stock is expected to move higher, traders could consider obtaining long exposure to the stock to profit. Several options strategies could be used to meet this objective.

Among those strategies is a bull put spread. The risk and reward diagram is shown below and it offers limited risk with limited potential gains. However, it is well suited for a stock which is in an uptrend.

bull put spread

Source: The Options Industry Council

This strategy involves two put options. One put option is bought and a second put option with the same expiration date but with a lower exercise price is sold. Selling the put option will generate immediate income, just like the more familiar covered call strategy would. But, unlike a covered call, risk is limited.

Many traders will be familiar with the idea of a covered call. This is a conservative strategy many long-term investors use to generate income in stocks they own that are unlikely to make large moves.

Although the bull put spread is different than a covered call, the bull put spread strategy meets the same objective as the covered call which is to generate some income. This trade generates immediate income and carries limited risk.

A Specific Trade for CVNA

For CVNA, a bull put spread could be opened with the September 21 put options. This trade can be opened by selling the September 21 $70 put option for about $5.45 and buying the September 21 $65 put for about $2.45.

This trade would result in a credit of $3.00, or $300 per contract since each contract covers 100 shares. That amount is also the maximum potential gain of the trade.

The maximum possible risk is the difference between the exercise prices of the two options less the premium received. For this trade, the difference between exercise prices is $5 ($70 – $65). This is multiplied by 100 since each contract covers 100 shares.

Subtracting the premium from that difference means, in dollar terms, the total risk on the trade is then $200 ($500 – $300).

The potential gain is about 150% of the amount of capital risked. This trade will be for about one week and the annualized rate of return provides a significant gain.

The bull put spread is an example of how options are a versatile tool and could meet many of your trading objectives. In this trade, options provide income and defined risk that could be lower than owning the stock. This strategy also has a high probability of success.

These are the type of strategies that are explained and used in TradingTips.com’s Options Insider service. To learn more about how options can be used to meet your goals, click here for details on Options Insider.