(Bloomberg) — Carvana Co.’s spectacular stock price crash is causing pain for many investors, but one group of Wall Street’s elite is feeling it acutely: hedge funds.
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The online used-car dealer, which has seen its stock fall 97% in the past 12 months, was considered a hedge fund darling, and for good reason. Collectively, these actively managed funds still own more than a quarter of the company’s shares, according to Bloomberg data.
Carvana’s plummeting fortunes represent just one of many growth investments that have fared poorly for hedge funds this year, giving investors a rare glimpse into how tightly controlled companies have fared during the intense sell-off in the market. However, the extent of Carvana’s rout stands out, threatening to make a significant dent in their portfolio’s valuations.
“The company was burning through cash flow at an alarming rate even before used-car prices started to decline,” said Ivana Delevska, chief investment officer at SPEAR Invest. “Now, with the underlying market deteriorating, Carvana is facing liquidity issues and will require significant balance sheet restructuring.”
Some have already decided to cut their losses and quit. Earlier this year, Tiger Global Management and D1 Capital Partners bailed out the company. Since D1’s announced release in May, the stock is down about 80%.
Carvana shares rose 0.5% as of 11:20 am in New York after plunging 5.1% to $7.71 on market open on Friday. The all-time closing high it hit in August of last year was $370.10.
About 15 months ago, Carvana’s downfall was hard to predict. The company, whose technology allows people to buy their used cars from the comfort of their couch, has been a winner of the pandemic. Cash-filled investors rushed into stocks and ideas that made it easier to conduct business without ever leaving your home.
But that has changed this year, with liquidity shrinking, inflation skyrocketing and the Federal Reserve aggressively raising interest rates, the stocks of unprofitable firms took the biggest hits. Investors are now looking for stability and value in the face of a looming recession and have been quick to avoid growth stocks. For Carvana, the reality of his business has also changed dramatically.
Used car prices have skyrocketed during the pandemic as production of new vehicles has stalled due to supply issues. This year, prices have begun to fall rapidly as shortages eased, putting pressure on Carvana’s margins. At the same time, demand has cooled and consumers have been squeezed by high inflation and rising rates.
Earlier this month, Carvana reported third-quarter results that fell short of analyst expectations. Chief executive Ernie Garcia said “cars are extremely expensive and they are extremely interest rate sensitive.”
Wall Street analysts, who have also begun to sound the alarm, see little hope for a quick turnaround.
JPMorgan analyst Rajat Gupta said there is currently no reason to buy neutrally rated Caravana shares. “Even as the sector bottoms out, we do not see a V-shaped recovery in the sector, particularly given the challenging medium-term supply dynamics for one- to five-year old cars and downside equity risk, coupled with the growing burden of Carvana’s debt,” he wrote in a note dated Nov. 22.
Spruce House Investment Management LLC, FPR Partners LLC, 683 Capital Management LLC, Point72 Asset Management LP and KPS Global Asset Management UK Ltd are the hedge funds with the largest holdings in the firm as of Sept. 30, according to data compiled by Bloomberg.
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