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Is it a Great Move to Go Short on Carvana Co. (CVNA)?

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Steel City Capital, an investment management firm, published its first-quarter 2022 investor letter – a copy of which can be downloaded here. Steel City Capital, LP (the “Partnership”) was essentially flat in the first quarter of 2022, net of fees and expenses. The Partnership declined 1.4% in April, bringing YTD’22 results to a negative 1.5%. Try to spend some time taking a look at the fund’s top 5 holdings to be informed about their best picks for 2022.

In its Q1 2022 investor letter, Steel City Capital mentioned Carvana Co. (NYSE:CVNA) and explained its insights for the company. Founded in 2012, Carvana Co. (NYSE:CVNA) is a Tempe, Arizona-based online used car retailer with a $10.5 billion market capitalization. Carvana Co. (NYSE:CVNA) delivered a -74.27% return since the beginning of the year, while its 12-month returns are down by -78.74%. The stock closed at $59.65 per share on May 04, 2022.

Here is what Steel City Capital has to say about Carvana Co. (NYSE:CVNA) in its Q1 2022 investor letter:

"Thus far in the second quarter, the same dynamic has sustained – roughly offsetting long and short returns with similar net long exposure. On the short side, the largest contributor by far has been Carvana (NYSE:CVNA). While I’m elated to see this short finally working, I’m nowhere near taking a “victory lap.” In totality, the Partnership remains underwater on the position. With this in mind, I thought it would be helpful (to both me and you) to share what I’ve learned along the way and articulate why I’ve been so persistent in pursuing this particular short.

Over the years, I’ve described my affinity for shorting CVNA like being in an abusive relationship: We kept getting hurt, but I kept coming back for more. I just couldn’t let go of what I perceived to be atrocious fundamentals, strained liquidity, and other red flags such as a web of related-party transactions and ongoing insider sales. But none of this mattered. Why not? Because I failed to accurately reflect on what made the stock go up and down. What do I mean by that? Let me expand on that concept by drawing on a quote from one of the world’s greatest investors (and native Pittsburgher), Stanley Druckenmiller:

When I first started out, I did thorough papers covering every aspect of a stock or industry. Before I could make the presentation to the stock selection committee, I first had to submit the paper to the research director. I particularly remember the time I gave him my paper on the banking industry. I felt very proud of my work. However, he read through it and said, “This is useless. What makes the stock go up and down?” That comment acted as a spur. Thereafter, I focused my analysis on seeking to identify the factors that were strongly correlated to a stock’s price movement as opposed to looking at all the fundamentals. Frankly, even today, many analysts still don’t know what makes their particular stock go up or down.

So what makes CVNA go up and down?..." (Click here to see the full text)

Uber, Ride Sharing, Car, Vehicle
Uber, Ride Sharing, Car, Vehicle

Photo by Paul Hanaoka on Unsplash

Our calculations show that Carvana Co. (NYSE:CVNA) fell short and didn’t make it on our list of the 30 Most Popular Stocks Among Hedge Funds. Carvana Co. (NYSE:CVNA) was in 56 hedge fund portfolios at the end of the fourth quarter of 2021, compared to 58 funds in the previous quarter. Carvana Co. (NYSE:CVNA) delivered a -62.34% return in the past 3 months. You can find other investor letters from hedge funds and prominent investors on our hedge fund investor letters 2022 Q1 page.

Disclosure: None. This article is originally published at Insider Monkey.