What Are Penny Stocks?
Penny stocks are shares of companies trading below $5 per share according to the standard definition. In 2022, plenty of well-known and household-name stocks have slipped below that five-dollar threshold. Though some have recovered, many remain at lower levels heading into the end of the year. The most important question is can these stocks recover?
All other things left constant, the short answer to that question is yes, but it all depends. It also doesn’t happen overnight. Companies like Nio Inc. (NYSE: NIO) took nearly a full year to recover completely, following a drop to lows of almost $1 a few years ago. Meanwhile, other companies like AMC Entertainment (NYSE: AMC) and GameStop (NYSE: GME) were on the list of penny stocks that had fallen on hard times thanks to the pandemic.
As we now know, the” Ape movement” ultimately sparked their recovery. What about now? Are there companies still at risk of becoming penny stocks even as broader markets climb back from 2022 lows? Over the last few months, we’ve compiled articles discussing several, including:
- Tattooed Chef (NASDAQ: TTCF)
- Robinhood Markets Inc. (NASDAQ: HOOD)
- DraftKings Inc. (NASDAQ: DKNG)
- Tattooed Chef (NASDAQ: TTCF)
- fuboTV Inc. (NASDAQ: FUBO)
- Canopy Growth Corp. (NASDAQ: CGC)
- Virgin Galactic (NYSE: SPCE)
- SoFi Technologies (NASDAQ: SOFI)
- Traeger Grills (NYSE: COOK)
- PLBY Group, Inc. (NASDAQ: PLBY)
- Snap, Inc. (NYSE: SNAP)
Many of these companies have eventually reached penny stock status though others have managed to maintain support above the $5 mark (for now). Today we look at a popular auto sales brand, Carvana Co. (NYSE: CVNA), as shares continue making new all-time lows this quarter. Will CVNA stock become a penny stock in 2022?
Will CVNA Stock Become A Penny Stock?
At the time of this article, shares of Carvana stock were hovering around $6.70. Like other companies on the previously posted list of penny stocks, CVNA has come under scrutiny for multiple reasons. One of which has to do with the slowing auto sales market. The company, notable for its car vending machines, had been one of the best-performing stocks on Wall Street. From its COVID lows to highs of $376.83 last year, CVNA stock returned a staggering 1,600% for investors during the period.
But that would be the top of the heap with the “vending machine” failing to return the goods ever since. This month, CVNA stock etched brand new all-time lows of $6.50 as the 2022 stock market crash, recessionary fears, interest rate hikes, and liquidity concerns put a chokehold on the company. The latest detriment was third-quarter results. Carvana reported worse-than-expected financial performance with a year-over-year drop in both revenue and retail units sold.
It also confirmed a CNBC report that it would lay off 1,500 employees or roughly 8% of its workforce. The company also commented on more sales reductions and expectations to miss its stretch goal on a per-unit basis this quarter. Management said:
“We made strong progress reducing SG&A expenses in Q3 2022. In May 2022, we outlined a stretch goal of $4,000 SG&A expense per retail unit sold, excluding depreciation, amortization, share-based compensation, and ADESA expenses in Q4 2022. This equated to a stretch goal of $4,350 to $4,450, including ADESA expenses…due to the current volume environment, we do not expect to reach this stretch goal on a per-unit basis in Q4…In Q4, we expect a sequential reduction in retail units sold and total GPU as the impacts of reduced used vehicle industry demand, increasing benchmark interest rates, higher used vehicle depreciation rates, and our profitability initiatives flow through.”
CVNA Stock Forecast
Despite insiders buying up shares this month, It hasn’t been enough to ease concerns or support the stock, for that matter. Special Projects President, Thomas Taira and Director Gregory Sullivan bought shares of CVNA stock in November, totaling nearly $200,000 in purchases. All other efforts have failed to bring optimism from the analyst community as well:
- Baird CVNA Stock Forecast: Neutral, $7 Price Target
- Cowen CVNA Stock Forecast: Market Perform, $10 Price Target
- Argus Research CVNA Stock Forecast: Sell
- Wedbush CVNA Stock Forecast: Neutral, $9 Price Target, Analyst notes unclear liquidity resolution and downside risks to forecasts
- Oppenheimer CVNA Stock Forecast: Perform, removed $100 price target, Analyst notes “challenges unlikely to abate”
- Wells Fargo CVNA Stock Forecast: Equal Weight, $25 Price Target
- JMP Securities CVNA Stock Forecast: Market Outperform, $45 Price Target. Analyst Nicholas Jones said in a research note: There weren’t any overt bright spots in the results, but the progress it has made and its ability to continue gaining market share show that management is focused on the right stuff and Carvana’s business model still provides a leading customer experience
- Morgan Stanley CVNA Stock Forecast: Pulled rating, CVNA stock could be worth as little as $1
There’s a wide range of CVNA stock forecast prices and varying ratings. Analysts’ sentiment remains bearish as shares hover less than $2 away from the penny stock threshold.
Should You Buy CVNA Stock Right Now?
Is CVNA stock a buy right now, or should you avoid it at all costs? The chart above shows a clear trend for the stock over the last year. But at its lowest price in history, is there some value to extract from this beaten-down name?
Taking some clues from its latest earnings recap, there could be a few bright spots to keep in mind if you’re bullish on Carvana. “We made significant progress in Q3 driving operational efficiencies despite the considerable headwinds facing our industry. Our committed team achieved notable cost reductions across our business while continuing to deliver exceptional customer experiences,” said Ernie Garcia, Carvana founder, and CEO.
“This economic environment remains uncertain, but we are focused squarely on the goal of driving the business to profitability. While progress is rarely linear, we remain on the path to becoming the largest and most profitable auto retailer.”
Short-term pain for long-term payout? That is something yet to be seen. However, Carvana isn’t unique in its current state. With higher rates, record inflation, and other headwinds in the stock market today, plenty of companies are working to streamline operations as stock prices slump.
In a Q3 shareholder update, management outlined several objectives. It said:
As discussed in our recent operating plan presentation, given the current industry, economy, and market environment, we have shifted our priorities to lowering expenses and driving positive free cash flow. However, this letter maintains our historical format built around the three objectives (1) Grow Retail Units and Revenue; (2) Increase Total Gross Profit Per Unit; and (3) Demonstrate Operating Leverage to discuss our key results.
How To Find Penny Stocks To Buy
Is Carvana going out of business? While the collapse of Carvana has happened over the last year and some are wondering about bankruptcy, that has yet to be determined as of today. But knowing how to handle headline risk, no matter which types of stocks you’re buying, is important.
Data can give some insight into the market potential of certain companies. But there’s no substitute for education. Learning how to trade is more valuable than simply finding the next stock pick from a random social media account.
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