Two COVID-Era Stocks Feeling the Fed’s Sting are Today’s Top Plays

Shah Gilani|June 27, 2022

As the Fed raises interest rates, easy access to cheap money is drying up, and companies that don’t make a profit, burn through cash, and rely on borrowing cheap money may be forced to default on interest payments without the possibility of refinancing.

This week, I want to focus on two companies that could feel the sting quickly.

The first of which is Carvana Co. (CVNA), the Arizona-based online platform for buying and selling used cars in the United States.

As prices for used cars soared during the COVID-era, CVNA was able to obtain cheap capital to buy inventory and then sell it to customers for a tidy profit on each sale. That was great for the company’s top line, but it didn’t make its way to the bottom line.

From 2018 to 2021, revenue grew 557% from $1.95 million in 2018 to $12.81 billion in 2021. On the bottom line, though, net income went from a $67.34 million loss to a $135 million loss.

Over the same period, net debt grew from $554.6 million to $5.01 billion.

As of the most recent quarter, the company is sitting on $6.75 billion in debt versus just $663 million in cash.

At the current price, CVNA has $79.88 per share of debt – but the stock is only trading at $28.44.

Yikes.

The company doesn’t have an actual plan to become profitable anytime soon which means it needs to continue borrowing money to keep operations afloat. And that’s coming at a time when interest rates are rising, consumer confidence is waning, and sky-high used car prices are beginning to soften.

That’s a terrible outlook.

At this point, I like buying the CVNA August 19, 2022 $27.50/25 Put Spread for $1.20 or less. Plan on exiting the trade for a 100% profit or if shares of CVNA close above $32.00.

I’m also watching Peloton Interactive, Inc. (PTON), the interactive fitness products provider.

When COVID locked everyone in their homes and kept them out of gyms, PTON exploded in popularity, and it showed in the company’s revenue and share price.

From 2018 to 2021, revenue exploded 824.14% from $435 million in 2018 to $4.02 billion in 2021. But, on the bottom line, net income went from a $47.9 million loss to a $189 million loss in the same period.

As of the most recent quarter, the company is sitting on $1.68 billion in debt versus just $879.3 million in cash.

Just like CVNA, Peleton isn’t expected to generate a profit until at least 2024, which means it will have to borrow more money to keep the doors open and the bikes rolling – and it will have to do that with higher interest rates and waning demand for their products.

At this point, I like buying the PTON August 19, 2022 $10/$9 Put Spread for $0.45 or less. Plan on exiting the trade for a 100% profit or if shares of PTON close above $12.00.

If you’re not sure how to play options, I encourage you to read our report on the subject. You can read by click here or checking out our special reports page.

That’s all from me today. See you on Tuesday.

Cheers,

Shah