CarMax’s 28.4% return over the past six months has outpaced the S&P 500 by 17.4%, and its stock price has climbed to $58.87 per share. This was partly thanks to its solid quarterly results, and the run-up might have investors contemplating their next move.

Is there a buying opportunity in CarMax, or does it present a risk to your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free.

Why Do We Think CarMax Will Underperform?

We’re happy investors have made money, but we’re sitting this one out for now. Here are three reasons we avoid KMX, plus one stock we’d rather own.

1. Flat Same-Store Sales Indicate Weak Demand

Same-store sales show the change in sales for a retailer’s e-commerce platform and brick-and-mortar shops that have existed for at least a year. This is a key performance indicator because it measures organic growth.

CarMax’s demand within its existing locations has barely increased over the last two years as its same-store sales were flat.

2. Low Gross Margin Reveals Weak Structural Profitability

At StockStory, we prefer high gross margin businesses because they indicate pricing power or differentiated products, giving the company a chance to generate higher operating profits.

CarMax has bad unit economics for a retailer, signaling it operates in a competitive market and lacks pricing power because its inventory is sold in many places. As you can see below, it averaged a 6.6% gross margin over the last two years. That means CarMax paid its suppliers a lot of money ($93.43 for every $100 in revenue) to run its business.

Final Judgment

CarMax doesn’t pass our quality test. With its shares beating the market recently, the stock trades at 20.8× forward P/E (or $58.87 per share). At this valuation, there’s a lot of good news priced in - we think other companies feature superior fundamentals at the moment. Let us point you toward the most dominant software business in the world.

Stocks We Like More Than CarMax

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