Car Prices Are Soaring. Why Are Car Dealer Stocks Down?

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Inflation data surprised to the upside Wednesday. That’s one estimate “beat” investors didn’t want to see. But a big reason for higher-than-expected inflation was car prices, which are soaring.

That should be a good thing for car-dealer stocks. But they are down on Wednesday.

Shares of online car dealers

Carvana

(ticker: CVNA) and

Vroom

(VRM) are down 5.9% and 2.3%, respectively, in recent trading. That compares with 1.3% and 1% respective drops in the

S&P 500

and

Dow Jones Industrial Average.

Traditional dealer and car-information provider stocks are weak Wednesday as well.

AutoNation

(AN),

CarMax

(KMX), and

Sonic Automotive

(SAH) shares are down about 2% on average. Shares of auto-data providers

Cars.com

(CARS),

CarGurus

(CARG), and

TrueCar

(TRUE) are down roughly 3%.

This feels wrong. Brokerages are spread businesses buying and selling for a small margin and piling up profits as volumes pick up, and brokerage stocks typically love rising prices. That’s true for stock traders. It’s true for car dealerships too.

Inflation helps spread businesses in another way. The existing inventory was typically bought months ago at lower prices. A car purchased wholesale by a used-car dealer in February is worth more at retail than it was back then. Buy-sell spreads tend to expand when prices rise.

So what’s up? For starters, the stocks have been on fire. The eight stocks listed above are up, on average, 108% over the past year and 10% year to date. Investors have already caught on to the fact that car prices are rising.

And today’s inflation data were bad. The April year-over-year increase in consumer prices was 4.2%. That’s higher than the Federal Reserve’s 2% target. In April 2020, of course, things were falling apart amid Covid-19 lockdowns. But the March to April pickup in prices, excluding food and energy, was 0.9%. That rate equals full-year inflation of more than 11%.

Inflation that high is like a parasite. It eats into savings and sucks energy out of the economy. It also tends to hurt stock valuations. The higher the inflation rate, the higher interest rates. And higher interest rates make it more expensive to operate businesses. It can also depress price/earnings ratios.

No one expects inflation to keep up at that rate. Car prices will help settle overall inflation numbers when car makers make more cars. A global semiconductor shortage is constraining car production around the globe. Auto makers are hopeful the supply situation will normalize by year end.

That will be welcomed by car investors who, today, appear to have gotten too much of a good thing.

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