Based on its last earnings report, used car company Shift Technologies, Inc (SFT) reads fine as a company. However, the stock is as ugly as can be. The only company-specific catalyst I could find to assign blame was the expiration of a lock-up on insider shares earned from warrants. There is little reason to expect insiders to bail with the warrants well underwater, but overhang can have a serious impact on investor psychology…especially if the market suspects something negative.
So with microscope in hand, an otherwise innocuous SEC filling by Shift Technologies caught my interest. Shift Technologies provided a supplement to its prospectus for the warrants. In that filing, SFT announced that COO Sean Foy earned a hefty retention bonus. From the January 12th filing (emphasis mine):
“On January 10, 2022, the Company entered into a Retention Bonus Agreement with Sean Foy, Chief Operating Officer of the Company (the “Retention Agreement”). Pursuant to the Retention Agreement, Mr. Foy will be eligible to receive a cash award of Two Million Dollars ($2,000,000) upon serving as a full-time employee in good standing through November 19, 2023 and executing a release agreement in favor of the Company.”
Given the plunge in the stock, this incentive bonus made me wonder whether Foy was considered a flight risk prior to this agreement. This retention bonus comes almost 3 years after Shift hired Foy. Foy was reportedly hired to help the company get IPO-ready. Having completed the mission and weighed down by a tanking stock, I can understand anyone’s motivation to move on to the next venture. Accordingly, I interpret this news of the retention bonus not only has a move to keep Foy parked at the company, but also a sign that SFT is doing what it can to maintain leadership stability. The company will need steady hands to navigate this bumpy road.
Shift Technologies: The Price Action and the Trade
My involvement with SFT began in such a promising manner. I followed insiders who loaded up on shares in November, 2020. However, the stock never made progress from that point. The subsequent and ensuing trading range was, in hindsight, a major warning sign. In the wake of a major technical breakdown a year later, I took the loss on my shares. Just from the last post-earnings close, SFT is down over 65%. The relentless selling has only allowed SFT ONE moment to enjoy at least two consecutive days of gains. In fact, that brief respite was so remarkable, I gingerly used that window in late December to buy back some SFT shares. Now all I can do is wait for COO Sean Foy to work some magic to jumpstart SFT and engineer some kind of U-turn. At this point, ANY good news from operations in the next earnings report should be greet with major relief.
Since SFT is in freefall, there is no point in trying to pick a bottom. SFT lost 24% just this past week. So from a technical perspective, I do not dare add to my SFT holdings until the stock creates some kind of extended base. From such a base, I need to see signs of potentially sustainable buyer interest.
The Used Car Sector
The stocks of SFT’s competitors are all suffering varying degrees of pain. The selling has impacted the digital-based newcomers the most. Revving prices for used cars was a tailwind for these companies. Now, it seems the market is anticipating a sharp reversal in these prices. Used car prices barely budged at the onset of the pandemic but soared stratospherically shortly after. The first chart below shows the U.S. used car price index since 2000. The second chart shows the year-over-year price change since 1980. Click the link in the caption to further explore the data.
SFT now sells at a bargain basement 0.7 times sales. The sell-off in Carvana (CVNA) pushed the stock down to 2.0 price/sales (P/S). Carmax (KMX) and Vroom (VRM) are down to 0.6 P/S. Autonation (AN) is down to 0.3 P/S! AN is actually the best performing stock of the bunch relative to all-time highs.
None of the new market entrants are making profits. Only the stalwarts AN and KMX earn money right now. AN sells at 8.4 trailing and 6.3 forward earnings. KMX is the “premium” player at 14.6 trailing and 14.3 forward earnings. Earnings will be ever more important for analysts and investors as the easy money policies of the Federal Reserve come to an end. Companies that could not figure out how to earn profits with soaring used car prices will have great challenges ahead.
Be careful out there!
Full disclosure: long SFT, long CVNA calendar put spread