Alphyn Capital Management, an investment management firm, released its third-quarter 2022 investor letter. The same can be downloaded here. In the third quarter, the fund returned -10.95% net compared to -4.88% return for the S&P 500 Index. Year-to-date the fund returned -34.2% compared to -23.9% return for the S&P500 Index. In addition, please check the fund’s top five holdings to know its best picks in 2022.
Alphyn Capital discussed stocks like CarMax, Inc. (NYSE:KMX) in the Q3 2022 investor letter. Based in Richmond, Virginia, CarMax, Inc. (NYSE:KMX) is a US-based used vehicle retailer. On October 21, 2022, CarMax, Inc. (NYSE:KMX) stock closed at $55.69 per share. One-month return of CarMax, Inc. (NYSE:KMX) was -30.36% and its shares lost 60.21% of their value over the last 52 weeks. CarMax, Inc. (NYSE:KMX) has a market capitalization of $8.8 billion.
Alphyn Capital made the following comment about CarMax, Inc. (NYSE:KMX) in its Q3 2022 investor letter:
“With its scale and customer-friendly business practices, CarMax, Inc. (NYSE:KMX) offers customers attractive and transparent “nohaggle” pricing, a wide selection, and a strong brand that reassures customers they are buying a vetted used car. With a well-developed wholesale business, CarMax has detailed pricing data on used vehicles of nearly every make, model, and trim, allowing it to purchase inventory effectively and pass on those costs to retail customers. Wholesale further provides CarMax with an avenue to sell vehicles that did not meet its relatively stringent standards for retail.
CarMax has one of the industry’s best cash flow profiles, partly due to the logistics of its operations and partly due to its captive financing business. CarMax Finance (CAF) segments customers into three tiers, offers to finance to the most creditworthy customers (tier 1), receives a fee from referring tier 2 customers to outside financing companies, and pays a fee for external financing companies to provide loans to tier 3 customers. CAF funds the loans through securitization; notably, these loans are non-recourse to CarMax. It earns a healthy 4-7% spread (depending on the cycle, rates, etc.) on the loans.
Until Carvana came on the scene, CarMax had a simple growth story. Every year it would build 10-15 new retail locations, on which it would generate attractive ~20% returns on investment. With less than 3% of the used car market, despite its size, it had plenty of room to grow. While Carvana proved that there was a market for cars online, CarMax has been a fast follower and now has a well-developed “omnichannel” retail operation. While Carvana has yet to figure out how to become profitable, CarMax uses its large footprint of stores to source, refurbish, and deliver cars profitably
The current environment is challenging, with demand coming down and loan loss rates increasing with interest rates, which has coincided with a ramp-up in spending as CarMax invests more in omnichannel. In the short term, margins will be hit. Nevertheless, CarMax’s honest and capable management has been through several cycles before and proven good stewards of capital; as a result, the company has been an attractive compounder, despite operating in a cyclical industry, and I expect it will continue to be so.”
CarMax, Inc. (NYSE:KMX) is not on our list of 30 Most Popular Stocks Among Hedge Funds. As per our database, 28 hedge fund portfolios held CarMax, Inc. (NYSE:KMX) at the end of the second quarter which was 27 in the previous quarter.
We discussed CarMax, Inc. (NYSE:KMX) in another article and shared Giverny Capital’s views on the company. In addition, please check out our hedge fund investor letters Q3 2022 page for more investor letters from hedge funds and other leading investors.
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