Reality Check: Why This Popular Stock Is Down 97%

Andy Snyder|November 28, 2022

Reality v. the Fed.

It’s one of the biggest cases in the court of the free market in our lifetimes.

The verdict will change the course of our financial future. If the jury goes one way… we’re in for a lifetime of despair. If it goes the other way… there’ll be more good times ahead.

The first witness to take the stand is the CEO of Carvana (CVNA) – that poor sap.

Shares of his company are down 97% this year. They’ve fallen more than 40% in just the last week – another victim of a lousy post-COVID-era earnings report.

Asked by Reality’s lawyer why he was forced to fire 1,500 more workers, the CEO’s words are damning for the Fed…

I think there are at least a couple of factors. The first is that the economic environment continues to face strong headwinds and the near future is uncertain. This is especially true for fast-growing companies and for businesses that sell expensive, often financed products where the purchase decision can be easily delayed, like cars.

The Fed is raising interest rates. That makes it hard for a company that gets 50% of its revenue from loans to maintain profit margins.

The jury scribbles down some notes. Things aren’t looking good for the Fed.

The defense ponders an insanity plea.

Not a bad idea given the Fed’s current cast of characters.

But wait… there’s more from the car company’s CEO. Reality’s attorney tries to get him to close his mouth, but in a nervous haze he keeps talking.

We failed to accurately predict how this would all play out and the impact it would have on our business. As a result, we find ourselves here.

The attorneys for the Fed pounce. They say it’s their client’s job to tighten when things need tightened. It’s the free market’s job to react in kind… and punish businesses that are unsustainable in a rising-rate environment.

There’s a roar of whispers from the jury box. We see the lead juror aggressively scratching out his notes and scribbling in some new lines.

“No more questions, your honor,” Reality’s attorney whimpers as he sits down and gives his star witness an expensive stare.

His case is busted.

The jury deliberates for just 10 minutes – just long enough to ensure the court gives them a full day’s pay. The verdict is no surprise.

“We the jury, in the case of Reality v. the Fed, unanimously find that Reality has failed to make its case and is therefore guilty of dereliction of duty.”

The legal scholars won’t have much to say about this one. It’s a cut-and-dried case.

Carvana – and so many other companies like it – failed to give a nod to Reality.

Reality Check

The Fed has a mandate. It must bust inflation and keep folks employed. It has the power to do what needs done. And like a clandestine government agency, it is immune to its own failings.

If it screws up, in other words, it’s up to Reality to deal with it – not the other way around.

Print an extra $5 trillion in new money? Stupid, yes. But Reality must be smart enough to see it and respond accordingly.

Raise rates too high, too quickly? Again… criminally naïve. But Reality must overcome naiveté, its longtime archnemesis.

Carvana failed.

The words quoted above weren’t from a court case. They were straight from an email to Carvana employees the CEO was about to lay off. He made it quite clear that he and his team messed up.

They failed to heed what the Fed was up to.

Carvana piled into used cars at exactly the wrong time. It overpaid for cars that were already too expensive. It bought real estate at exactly the wrong time. And it dumped capital into a business model that worked only when rates were low and stimulus dollars were flowing into mailboxes.

The Fed screwed up… but Carvana should have seen it coming.

For investors, this is a critical case. It’s the epitome of an error in judgement. Reality was nowhere to be found. But many more cases like it abound. Many companies built models that depend on ultra-low rates, stimulus money and the Fed buying any unwanted asset.

We aren’t seeing those things anymore… and we may not again.

Take this case as a lesson.

If Reality doesn’t have a home in your portfolio… make room for it.

The court’s docket is full. Many more companies are bound to follow Carvana’s embarrassing lead.