Steel City Capital, an investment management firm, published its fourth-quarter 2021 investor letter – a copy of which can be downloaded here. A quarterly portfolio net return of 8.4% was recorded by the fund for the full year of 2021. This compares to its benchmarks, the S&P 500 and Russell 2000 Index which had 26.9% and 14.5% returns respectively for the same period. During the year, the Partnership’s long book contributed 9.2% to returns. Spare some time to check the fund’s top 5 holdings to have a clue about their top bets for 2022.
Steel City Capital, in its Q4 2021 investor letter, mentioned Carvana Co. (NYSE: CVNA) and discussed its stance on the firm. Carvana Co. is a Tempe, Arizona-based used car dealers company with a $25.3 billion market capitalization. CVNA delivered a -38.52% return since the beginning of the year, while its 12-month returns are down by -51.90%. The stock closed at $142.50 per share on February 15, 2022.
Here is what Steel City Capital has to say about Carvana Co. in its Q4 2021 investor letter:
“Without naming names, I noticed a curious theme among a cohort of other managers (ranging from “emerging” to well-established) who I follow from a distance: many wildly outperformed in 2020, but posted negative returns in 2021. Their results largely turned negative in the second half of last year, just as the Federal Reserve retired the adjective “transitory” from its vocabulary, expectations for inflation became more deep-seated, and rates began to rise. In certain cases, these managers have been on the other side of our short positions. I don’t begrudge them (or their clients) their successes, but I can’t help but wonder if their strong historical returns reflected little more than luckily timed trades into a market juiced by unsustainably low rates and teeming with speculative excess. I also can’t imagine they’ve fared much better thus far in 2022. Time will tell. But the totality of the situation does bring to mind the old quote about not knowing who is swimming without their trunks until the tide goes out…
A prime example is Carvana (CVNA), a company of which I have been critical for some time. From the bulls, there’s been a lot of slobbering over things like customer experience (if you consider rampant issues with title transfer in multiple states a hallmark of a positive customer experience) and blind faith put in the company’s long-term projections to justify today’s valuation. They point to positive trends in gross profit per unit (GPU) and EBITDA per unit as signs the company is successfully scaling.
But what has driven the improving unit metrics?
A peek “under the hood” shows that while vehicle GPU (the difference between the sale price of a vehicle and what CVNA has paid to acquire and recondition it) has remained relatively static, “Other” gross profit per unit has expanded significantly since the onset of the pandemic. And what’s behind this increase of “Other” gross profit? This has been dominated by finance related income – specifically gains on the successful securitization of customer loans. Well – what drives finance income / gains on sale? Two factors: interest rates and loan size. Until recently, interest rates were plumbing all-time lows; at the same time, the price of used vehicles reached all-time highs, driving elevated loan balances on vehicle purchases. The combination super-charged CVNA’s finance profits. But as I “go to print,” the yield on the 10-year treasury is at its highest level since late 2019 and there are some signs that used vehicle prices have peaked. This partially explains CVNA’s retreat from its highs, but I think there’s still a ways to go. More generally, I think unprofitable growth companies and other pandemic darlings will continue to struggle going forward.”
Photo by Nima Sarram on Unsplash
Our calculations show that Carvana Co. (NYSE: CVNA) failed to obtain a mark on our list of the 30 Most Popular Stocks Among Hedge Funds. CVNA was in 58 hedge fund portfolios at the end of the third quarter of 2021, compared to 63 funds in the previous quarter. Carvana Co. (NYSE: CVNA) delivered a -52.62% return in the past 3 months.
In December 2021, we also shared another hedge fund’s views on CVNA in another article. You can find other letters from hedge funds and prominent investors on our hedge fund investor letters 2021 Q4 page.
Disclosure: None. This article is originally published at Insider Monkey.
