More on KMX: Au contraire.....

Have a look at this seekingalpha.com article about CarMax's most recent quarter. Read it here.


This type of reasoning is commonplace amongst most analysts, media moguls and the general public, in fact. A profitable, extremely well managed company with the largest market share in an industry sector and a proven business plan suffers margin contraction because of hard economic times and other variables out of its control (fuel prices etc). The share prices drops, usually by a disproportionate amount because of fear and uncertainty about the near term future earnings.

So these guys will tell you, "Sell now-- the price is dropping! Who knows how low it will go and when it will turn around?" When it does turn around and all the "smart money" has jumped back in, they will tell you, "Everything looks rosy for KMX: strong buy!" Isn't this exactly what were supposed to avoid doing.... selling low and buying high?

Momentum investing is almost irresistible, isn't it? The problem is that it requires exquisite market timing, something that even George Soros cannot do consistently over any length of time.

For us mere mortals, we need to ask ourselves the following about Car Max:

• Does the business have favourable long term prospects? Can you imagine a world without used car lots? Check
• Does the business have a consistent operating history? Check
• Plausible easy to understand business plan? Check
• Can and has the management shown they can execute? Check
• Is management rational and do they have "skin in the game' (insider ownership)? Check
• Is the reason for the share price decrease and/or earnings depression due to a temporary condition? Almost certainly Check
• Is management candid with its shareholders? I say Check. Read the most recent conf call and see how the CEO and CFO respond to the analyst's grilling session. Definitely candid. Some are not happy that Mr. Folliard refused to give earnings guidance for the remainder of the year but I think he's simply telling the truth--- he doesn't know! If he was like many other execs I will not name here, he would reassure us.
• Does management resist the "institutional imperative"? Check. (by this term, Buffet means that they're not afraid to go against the crowd, destroy unproductive corporate culture and be free thinking i.e. lead rather than follow the rest of the industry). There isn't the slightest doubt that KMX fits this criteria-- go to my original analysis months back for an explanation of how KMX differs from its competitors.
• trading at discount to FMV? Check. Well, at $15, probably a 25% discount calculated ultra-conservatively. If we're lucky the share price will drop to the low teens.
• ROE double digits? Check 13.3%

I'm probably calling this one a bit early as it's hard to believe that in less than a year or two the oil spike will either recede or stabilize along with fuel prices and then as always, consumers will get used to it at that level bringing the consumers back to the used car lot. I do know that knowing when to buy a great business at the bottom is next to impossible. So I plan to split my allocated capital for investment in KMX into fourths and buy every 3-4 months at new lows. Some guidance in either direction should be available at the quarter's report.

I am convinced that this company will emerge down the line as an even stronger market leader. It's pretty clear that the competition will suffer greatly in these dire times for auto resellers.

l