The biggest gaining stock on the Russell 2000 is up 1,100% this year after suffering a near total collapse in 2022

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In the opening six minutes of trading Wednesday, the online used-car vendor’s stock soared 43% — more than what the red-hot Nasdaq Composite Index has all year. That it would give back a chunk of those gains later in the session — it was up a mere 40% at Wednesday’s close — means little in the larger scheme of things. At the highest point, the stock climbed 1,100% for the year, the biggest gain in the entire Russell 2000 and a sharp reversal from its 98% plunge in 2022.

The company, which shot to prominence on its promise of letting people buy used cars from the comfort of their living-room sofa, has been enjoying a very different kind of fame lately. It has become a poster-child for the latest rebirth of the meme-stock mania that had gripped the equity markets in the first years of the Covid-19 pandemic.

The trigger for Wednesday’s round of frenetic buying in was a deal to restructure Carvana’s massive pile of debt, that helped to allay lingering concerns about the company’s liquidity. Second-quarter revenue that beat analysts’ expectations further bolstered the stock.  

The rapid rally marks a dramatic comeback for the company, though Carvana shares are still well below the record high touched in August 2021 at the height of the pandemic-driven stock-market boom. Some say the move is too extreme for a business that has yet to be profitable, and that it ignores the many risks still lurking in the used-car industry.    

“The action in Carvana is a sign that a bit too much euphoria is creeping into the marketplace,” Matthew Maley, chief market strategist for Miller Tabak + Co., said in an interview. 

“When some stocks see parabolic moves that are totally detached from their underlying fundamentals at a time when the stock market has become expensive, it’s a sign that a certain amount of froth has returned to the market.” 

Carvana was among the many investor-darlings of 2020 and 2021, when production of new vehicles suffered due to severe supply-chain issues, leading to shortages of new cars and sending the prices of used cars through the roof. This year though, those sky-high prices are coming down fast, signaling troubles ahead for companies that sell used vehicles.  

“Carvana’s debt deal is a smart move as the risk that consumption gets crushed in the second half of the year is elevated,” said Ed Moya, senior equity analyst at Oanda. “Carvana has had a nice ride this year but it looks like it might be a bumpy ride going forward.” 

In fact, higher-risk growth stocks that had fallen out of favor last year when investors were fleeing to safety in face of recession fears, a hawkish Federal Reserve and sticky inflation, have been back in vogue in recent months. At the same time, interest in stocks with a high short interest has returned as well. On Wednesday, several heavily shorted names, including Lemonade Inc., FuboTV Inc., Peloton Interactive Inc. and Rackspace Technology Inc., climbed sharply.

Carvana checks both those boxes. About 48% of the company’s free float is held short, according to data from S3 Partners. As of intraday Wednesday, Carvana shorts were down $2.1 billion in year-to-date mark-to-market losses.

And S3’s Ihor Dusaniwsky expects short sellers’ pain to get even worse amid Wednesday’s surge. 

“The Carvana short squeeze is going to tighten even more with today’s upward price action,” Dusaniwsky said. “Expect more short covering today and over the next few days as short sellers look for exit points to trim their exposure in a very unprofitable trade.”