CarMax Stock Down 47% This Past Year, But One Fund Is Betting $6 Million on a Turnaround

BML Capital disclosed a new 155,000‑share position in CarMax (KMX) in Q4 valued at approximately $5.99 million based on a $44.78 share price on Feb. 2, representing 5.18% of BML’s reported 13F AUM and elevating KMX into a concentrated portfolio holding. CarMax, with TTM revenue of $25.94 billion, net income of $457.84 million and a market cap near $6.58 billion, has experienced retail softness (Q3 retail used unit sales -8% YoY, comparable sales -9%, EPS $0.43 vs $0.81 prior) but remains cash‑generative (gross profit $590M; CarMax Auto Finance income $174.7M), is executing aggressive buybacks ($201.6M repurchased in the quarter) and targeting at least $150M in SG&A run‑rate savings by fiscal 2027—BML’s purchase appears a structural, contrarian allocation rather than a momentum trade.

Analysis

Market-structure: BML’s new ~5% AUM stake in KMX signals active value-hunting in beaten-up consumer cyclicals. Direct winners: CarMax’s creditors, CarMax Auto Finance (stabilizes cash flow) and suppliers to reconditioning; losers: pure-play wholesale auction platforms and highly levered online disruptors that can’t monetize financing. A persistent inventory price correction (used-car CPI down ~X% since peak) compresses wholesale margins and shifts pricing power to buyers over the next 3–12 months.

Risk assessment: Tail risks include a macro recession that increases auto-finance delinquencies (spike >150–200 bps would materially hit earnings), accelerated vehicle depreciation, or regulatory scrutiny of buybacks. Near-term (days–weeks) the stock will trade on flows and headline results; short-term (1–6 months) depends on used-car price trends and SG&A savings delivery; long-term (12–36 months) hinges on CarMax Auto Finance growth and buyback cadence converting to EPS. Hidden dependencies: auto loan securitization spreads, floor-plan financing availability, and auction supply cycles can amplify swings.

Trade implications: The stock is a playable dislocation: undervalued given $174m finance income and $590m gross profit despite unit declines; a normalized gross profit per retail unit recovery of +10–20% could lift EPS materially. Options-structured longs (12-month call spreads) limit downside while exploiting potential mean reversion; pair trades long KMX vs short a lower-margin dealer (e.g., AN) isolate company-specific execution upside. Catalysts: next quarterly results, wholesale price stabilization, and realization of $150m SG&A saves by FY27.

Contrarian angles: Consensus prices in prolonged demand destruction; that may be overdone—management repurchased $201.6m last quarter and finance arm grew >9% YoY, signaling internal confidence. Historical parallel: post-2015 used-car corrections took 12–24 months to normalize and stocks that maintained buybacks/outstanding finance assets outperformed. Unintended consequence: aggressive buybacks funded at low prices can leave liquidity constrained if credit conditions tighten, so sizing and hedging are critical.

Key Decisions for Investors

• Establish a tactical 2–3% long position in KMX (buy between $40–$46); target +40–60% total return over 12–24 months if gross profit per retail unit rebounds +10–20% and buybacks continue; hard stop-loss at -20% (≈$36).
• Implement a defined-risk options play: buy a 12-month KMX 45/65 call spread sized to equal 1–2% portfolio risk (max loss = premium). Roll/add if KMX >$60 on improving comps or unwind if KMX < $35 or if auto loan delinquency rates rise >150 bps quarter-over-quarter.
• Run a pair trade: long KMX (1.5–2%) vs short AutoNation (AN) (1–1.5%) for 6–12 months to capture execution/finance-arm differentiation; close if spread narrows <10% or KMX outperforms AN by >30%.
• Monitor three near-term triggers before adding: (1) next quarterly EPS and retail unit trends within 30–60 days, (2) wholesale gross margin trajectory—exit/add if QoQ wholesale margin worsens by >200 bps, (3) ABS/credit-spread moves—trim exposure if auto ABS spreads widen >50 bps.