Why Carvana Stock Popped 10% This Morning

What happened

Online car-shopping website Carvana (NYSE: CVNA) had a good day Wednesday, although it might have been an even better day. Early trading saw Carvana stock spike more than 10% higher on a positive mention of the stock by Wolfe Research.

Later in the day, about half these gains evaporated -- but still left Carvana stock up a healthy 5.4% by close of trading. The question is "why?"

So what

The answer is that Wolfe Research report I just mentioned. StreetInsider.com has the details. As it explains, Wolfe reiterated its outperform rating and $65 price target on Carvana stock, which closed today's trading just a few cents shy of $56 a share.

Wolfe says it's been waiting a while to see a "massive catalyst" to unlock value in Carvana stock -- namely, a "path" to improving profits at the company's auto financing business.

"CVNA is significantly under-earning in its credit business," notes Wolfe, a point that's hard to argue, seeing that Carvana hasn't earned a profit in the last five years. But Carvana has now filed an "ABS-15G" report on a batch of asset-backed securities known as "Carvana Auto Receivables Trust 2019-1" -- a move that seems tied to a due-diligence investigation by someone who wants to buy these loans.

Now what

Such a sale, argues Wolfe, could lower Carvana's "cost of funds" and improve its "Financing Income." It could even "include some of Carvana's deep subprime loans [and] completely remove a significant overhang on the stock from investor concerns around self-dealing in its credit biz," says the analyst.

Whether any or all of this will be enough to turn Carvana into a profitable company remains to be seen. As for today, though, it's already been enough to give Carvana stock a lift.

10 stocks we like better than Carvana Co.When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has quadrupled the market.*

David and Tom just revealed what they believe are the ten best stocks for investors to buy right now... and Carvana Co. wasn't one of them! That's right -- they think these 10 stocks are even better buys.

See the 10 stocks

*Stock Advisor returns as of March 1, 2019

Rich Smith has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.