The Auto Industry is Cooling Off – and CarGurus is Starting to Feel the Heat (Why CARG is Rated a Sell)

The used car market – and the auto industry as a whole – has been rapidly growing over the past year and a half. The market peaked in February, and while prices are still higher now than in previous years, we’re seeing the median price of pre-owned cars finally start to trend back to earth. For those looking to ditch their old ride and cruise in something new, this is good news. For companies in the automobile industry, though, this is cause for concern. And one company in particular – CarGurus – is starting to feel the effects of this slowing market.

There are quite a few reasons for the skyrocketing of the used car industry in particular. The primary cause was a shortage of microchips used to produce new cars. Since the pandemic’s start, the production of new automobiles has slowed dramatically. This shortage of supply caused a spike in prices for both new and used cars. Furthering this car market boom was increased consumer spending.

But many experts suggest that the auto industry is finally cooling off. President Biden signed off on the “Chips and Science Act”, which allocated $52 billion for American semiconductor manufacturers. There continues to be more and more talk of a looming recession – which has buyers wavering in what they’re willing to pay. This combination of increased supply and decreased demand spells disaster for cars that depend on the market – such as CarGurus.

Why Investors are Selling CarGurus – and Why You May Want to Follow Suit

While this company has thrived over the past few years with the state of the used car market, they’re already starting to show signs of slowing down – and trending in the wrong direction. Third-quarter adjusted EPS and sales guidance fell below expectations. Revenues for the quarter are expected to come in at somewhere between $460-490 million – while analysts were expecting over $550 million. Furthermore, the company expects an EPS of as little as $0.25 – short of the expected EPS of $0.33.
The VectorVest system relies on three intuitive metrics to analyze stocks and simplify investing: Relative Value, Safety, and Timing. Together, these metrics make up our VST rating system – and right now, CARG is rated as a SELL. Here’s why:

• It’s not a safe stock: Our RS (Relative Safety) rating of CARG indicates that its ability to generate consistent and predictable company financials sits below the average in the market at 0.87 on a scale of 0.00-2.00. This may indicate that CARG rode a strong wave and change in the market but it’s not sustainable long term.
• It’s trending the wrong way: The RT (Relative Timing) rating for CARG is currently 0.57 – which is poor on a scale of 0.00-2.00. This rating comes from an analysis of the direction, magnitude, and dynamics of a stock’s price moment. Simply put, it’s trending the wrong way – and that trend is strengthening.
• It cannot resist severe/lengthy price declines: Our comfort index (CI) takes into account a stock’s long-term price history – and speaks to a company’s ability to weather the storm. CARG has a CI rating of 0.43, which is dismal on our sliding scale of 0.00-2.00.

Taking into account all indicators and analysis, our simplified VST rating for CARG is 0.90 – below the average of 1.00. The scary part is that this is just beginning. As demand falls and

supply rises in the auto industry, car prices – and stock prices of companies situated in this industry – will continue to fall. As such, our stock picking software has rated CARG a SELL.

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VectorVest advocates buying safe, undervalued stocks, rising in price. As for CarGurus, it is not safe, it is not undervalued, and has poor timing.

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