Adding Carvana to my 'Stinky Six'; Five articles I recommend on AI; Quick updates on Todd Combs, Joby Aviation, PepsiCo, and Tripadvisor; Happy anniversary, Mom and Dad!
1) The stock of China fraud QMMM (QMMM) has been suspended since I included it in my list of "Stinky Six" stocks to avoid. So I'm replacing it on the list with Carvana (CVNA) – the online used-car retailer.
My outlook on Carvana is a big shift from six years ago...
I first wrote about the stock favorably in my November 1, 2019 e-mail – saying that the long pitch I heard for the stock was the "most intriguing idea I heard at the Robin Hood conference earlier [that] week."
As I noted, CVNA shares had been on a tear:
They've more than doubled over the past year to hit a recent all-time high, despite growing losses. (In fact, the company has never reported even one quarter with positive [earnings before interest, taxes, depreciation, and amortization ("EBITDA")], net income, or operating cash flow.)
As such, that made Carvana a controversial stock – with a high 36% short interest at the time. But as I continued:
There's no question that the used-car market is enormous – twice the size of the new-car market – and poorly served currently, so it's ripe for disruption. If you're interested in reading the bull case, check out these two write-ups that were posted on ValueInvestorsClub in October 2017 and December 2018.
It was a great call for a while...
CVNA shares closed on November 1, 2019 at $82.73. Over the next two years, they quadrupled to more than $360.
But then, they crashed by a staggering 99% over the next 16 months to less than $4 near the end of 2022... before rising an even more staggering 130 times since then. This is one of the craziest stock charts I've ever seen:
Looking ahead, Carvana is set to be added to the S&P 500 Index on December 22... which has been fueling the stock's recent parabolic move.
However, Carvana hit my radar screen as a stock to avoid at the beginning of this year...
On January 2, my friend and activist short seller Nate Anderson of Hindenburg Research – who's most famous for exposing the fraud at Nikola (NKLAQ) – published a report calling the company "a father-son accounting grift for the ages."
Here are a few of the warning flags that Anderson identified in the report:
- ... our research, including extensive document review and 49 interviews with industry experts, former Carvana employees, competitors and related parties of the company, undertaken over the course of 4 months, shows Carvana's turnaround is a mirage.
- Our research uncovered $800 million in loan sales to a suspected undisclosed related party, along with details on how accounting manipulation and lax underwriting have fueled temporary reported income growth – all while insiders cash out billions in stock.
- Even before considering the findings of our investigation, Carvana is exorbitantly valued, trading at an 845% higher sales multiple relative to online car peers CarMax and AutoNation, and a 754% premium on a forward earnings basis. The company has ~$4.8 billion in net debt and is junk-rated by ratings agencies...
- As insiders unload stock, the company's solvency risks remain. Almost 26% of Carvana's gross profit consisted of sales of customer auto loans to third parties, largely in the risky subprime and deep subprime space. Gain on loan sales represented 2.2x Carvana's net income in the past 9 months.
I recently checked in with Anderson about Carvana. He said he wouldn't change a word of what he wrote. And he thinks it's even more of a stock to avoid now that it has more than doubled this year.
In June, Carvana hit my radar screen again when I saw this Bloomberg interview with another friend, legendary short seller Jim Chanos: Jim Chanos on Bull Market, Tesla, Carvana, and Michael Saylor.
More recently, the smartest financial analyst I know also warned about Carvana...
In my November 13 e-mail, I shared his latest thoughts on his favorite stock – Willis Lease Finance (WLFC).
And when I asked him about his favorite short idea, I shared what he told me with my readers, too:
You left Carvana (CVNA) off your "Stinky Six"! We think it could be a bankruptcy.
They are super promotional so the stock could go anywhere in the short term...
But one thing that isn't being discussed is that the subprime auto asset-backed-securities market is showing some pretty big signs of stress and spreads are starting to really widen. If the asset-backed securities market turns off for Carvana, it could really unravel...
Plus, everything about this company is suspicious – there are so many things that just don't pass the sniff test.
(To reiterate what I've said many times, I don't recommend shorting stocks. My advice is to simply avoid them.)
Lastly, on November 23, I read a report posted under the "Legal Special Situations" handle on Substack. It argues that the stock is "worth zero."
Here's an excerpt:
A staggering 93% of Carvana's Net Income YTD comes from the "Gain on Loan Sale."
This is not "Scale Economics Shared," it is "Risk Hidden Separately." They are using Gain-on-Sale accounting to book the projected lifetime profit of a loan the second they sell it. It's an arbitrage play.
And as the report continues:
To fuel this machine, Carvana aggressively targets the highest-risk borrowers. Carvana boasts a "99% approval rate" and requires an annual income of just over $5,000. This is deep subprime lending, allowing individuals to take loans requiring "almost 50% of their entire annual income."
Carvana mitigates its exposure only by immediately offloading these loans. YTD 2025, they originated $9.18 billion in loans and sold $9.58 billion. If the credit cycle turns, if the appetite for subprime auto ABS freezes, this revenue stream evaporates instantly, rendering the company deeply unprofitable.
Overall, Carvana looks like it has plenty of problems simmering.
Next week, I'll analyze Carvana's financial statements and valuation, so stay tuned...
2) Regular readers know that I've written extensively about artificial intelligence ("AI") in recent weeks...
As such, I'm not going to engage in an in-depth discussion of five recent articles that caught my eye from the New York Times and Wall Street Journal. However, I'll still share the links for folks who are interested. For further reading on AI, I recommend checking these out:
- NYT: Don't Fear the Bubble Bursting (it's an op-ed by Dr. Carl Benedikt Frey – an economist at the University of Oxford and the author of How Progress Ends: Technology, Innovation and the Fate of Nations)
- WSJ: The Accounting Uproar Over How Fast an AI Chip Depreciates (it mentions Michael Burry's critique, which I covered in my November 26 e-mail)
3) And here are four quick bullet points on stocks I've discussed in recent e-mails (you can always search the archive of all of my daily e-mails here):
- The Financial Times has the inside scoop on Todd Combs leaving Berkshire Hathaway (BRK-B) for JPMorgan Chase (JPM), which I covered in Monday's e-mail: How Jamie Dimon lured a Warren Buffett protégé to JPMorgan.
- I enjoyed this podcast interview with Charles Lemonides, the founder of ValueWorks. He makes a compelling case for one of my favorite stocks, Joby Aviation (JOBY).
- I analyzed beverage and snack giant PepsiCo (PEP) in my September 10, September 11, and September 12 e-mails after activist investor Elliott Investment Management announced that it had taken a roughly $4 billion stake in the company.
The stock is up a bit since that first e-mail. And here's the latest news from the WSJ on Monday: PepsiCo to Cut Costs, Lower Food Prices in Deal With Activist.
- Activist hedge fund Starboard Value gave this presentation in October making the case for travel site Tripadvisor (TRIP). I wrote about Tripadvisor in my e-mails on January 7, January 8, January 24, and January 27. The stock is roughly flat since then.
4) My wife and I will be flying to Kenya to spend the holidays with my parents, who celebrated their 63rd anniversary on Wednesday.
Here's a picture from their wedding in the Philippines, where they served in the Peace Corps from 1962 to 1964:
Happy anniversary, Mom and Dad!
Best regards,
Whitney
P.S. I welcome your feedback – send me an e-mail by clicking here.