NEW YORK (TheStreet) -- Investors in CarMax (KMX) stock should sell shares today to avoid a potential downside reaction to earnings after the company reports quarterly results before the opening bell on Tuesday.
One reason for concern comes from recent auto sales surveys which show a decline in used car prices. During the Great Recession used-car prices surged 25% and peaked in May 2011 as consumers bought cheaper autos. In August used-car prices were down 1.6% year-over-year and auto analysts expect this trend to continue.
Another reason for concern is the solid recovery in new car sales over the past few years. Many autos are coming off leases further increasing inventories of used cars.
CarMax has a history of extreme volatility after reporting quarterly earnings, so why take on downside risk. Sometimes the volatility is up, sometimes it's down. Last December shares declined following earnings. On June 20 CarMax surged 18% after the company beat analysts estimates. Today the stock is just below an all-time high set on Sept. 8. Book your profits now!
Potential share price volatility following earnings reports shows the importance of looking at a company's daily and weekly charts for a stock before it reports quarterly results.
So far this year many stocks have had significant price volatility either up or down in reaction to their earnings reports. A stock's daily and weekly price patterns provide performance road maps that are used to gauge the potential future path, which is the guidance investors need.
For CarMax, analysts expect the company to report earnings-per-share 67 cents. The important components to focus on are total used vehicle sales, same store used unit sales and income from the company's financing arm.
Let's take a look at the daily chart for CarMax.
Courtesy of MetaStock Xenith
The daily chart for CarMax ($53.57) shows the upward volatility following last quarter's earnings in June. The 50-day simple moving average (blue line) crossed above the 200-day simple moving (green line) on July 17 in what market technicians call a "Golden Cross". This signal led the stock to an all-time intraday high at $54.28 set on Sept.8.
Let's take a look at the weekly chart for CarMax.
Courtesy of MetaStock Xenith
The weekly chart for CarMax shows the buying opportunity from a test of the 200-week simple moving average (green line) then at $19.15 in July 2010. The downside risk for the stock is back to the 200-week, now at $38.08 and rising.
Investors looking to buy CarMax shares should consider entering a "good-'til-canceled" limit order to buy weakness to $46.75, a share price that I project should hold on weakness.
Investors long the stock and willing to wait for the earnings results should consider entering a "good-'til-canceled" limit order to sell strength to $56.60, a share price that I project should limit the upside for the stock.
At the time of publication the author held no positions in any of the stocks mentioned.
This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.
TheStreet Ratings team rates CARMAX INC as a Buy with a ratings score of B. TheStreet Ratings Team has this to say about their recommendation:
"We rate CARMAX INC (KMX) a BUY. This is driven by a few notable strengths, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover. The company's strengths can be seen in multiple areas, such as its revenue growth, impressive record of earnings per share growth, increase in net income, notable return on equity and increase in stock price during the past year. We feel these strengths outweigh the fact that the company has had generally high debt management risk by most measures that we evaluated."
You can view the full analysis from the report here: KMX Ratings Report