Short Sellers Faced Off Against Big-Name Hedge Funds in Carvana — And Won

The online used car dealer has hit a new low, making it the most profitable short of the year.

Illustration by II

Illustration by II

For years online used car dealer Carvana has been a battleground stock, with some of the biggest names in hedge funds facing off against a few scrappy short sellers. Now Carvana has become the most profitable short of 2022 by one measure, while the hedge funds have sold out amid steep losses.

The fate of the already beaten-down Carvana turned particularly dire in recent days, as its stock fell 50 percent after a longtime bullish analyst at Morgan Stanley looked at its earnings and pulled his rating on the stock, saying the company might be worth only $1 per share.

The analyst, Adam Jonas, may have been late to realize Carvana’s problems: He had a $420 price target on Carvana as recently as March. But a plucky short seller had called the company sketchy as early as November of 2019 — pitting himself against the biggest names in hedge funds.

At that time, Carvana was already a hedge fund hotel, with 45 of those so-called smart money investors owning the stock. Carvana even made the list of hot picks at the Robin Hood investment conference in October of 2019, when when Alex Sacerdote of Whale Rock Capital Management pitched it.

Within weeks of that event, Jared Rose, a portfolio manager at Toronto-based Gravity Partners Capital Management, put out his first Seeking Alpha post, under a pseudonym, noting — among other things — that the company was an unprofitable “sales channel” that was structured as a bankruptcy-remote subsidiary to siphon cash to insiders.

(Later, articles in the Wall Street Journal questioned the car dealer’s related party transactions. Then the Securities and Exchange Commission opened an investigation, according to Probes Reporter, which reported that the company buried the information — and then insiders began selling shares.)

On Twitter, Rose and his analysis got the attention of well-known short seller Marc Cohodes, who said he began shorting the stock when it was trading in the 200s. “Carvana is a subprime auto lender disguised as a seller using a car vending machine as a wrapper…and the only thing a vending machine is good for is candy,” Cohodes told Institutional Investor.

(Carvana did not respond to a request for comment by presstime.)

Nonetheless, the narrative of the online used car auto dealer gained momentum during the Covid pandemic. Rose covered his short (temporarily), and the stock went on a wild ride, peaking at $360 in August of 2021 as the pandemic fueled sales of used cars. The company was at that point worth a stunning $60 billion.

Rose says he shorted Carvana again in 2020 “and made it a very large position in late 2021 when my thesis was that Carvana had run out of cash, couldn’t issue more debt due to covenants, and didn’t really have necessary disclosures to raise equity.”

Carvana was able to raise more money, but those who bought into the latest offerings are being stung the most. This includes Clifford Sosin of Sosin Partners, which was Carvana’s fourth-largest investor at the end of June. Throughout the year, Sosin kept buying Carvana’s stock as the price continued to slide. He added to his stake by 25 percent in the first quarter and by another 61 percent in the second quarter, as II previously reported. Sosin even bragged to investors that he bought into an April financing at $80 per share.

As a result, some 23 percent of Sosin’s public equities portfolio was invested in Carvana stock at the end of June, and by the end of September, the fund was down more than 70 percent for the year.

The stock has also been a major loser for other hedge funds, including its Robin Hood promoter Whale Rock. Sacerdote’s fund was down 40 percent as of August this year, as II previously reported. Whale Rock liquidated its position in Carvana during the first quarter of 2022, as did DI Capital Partners and Stanley Druckenmiller.

Meanwhile, Tiger Global added close to 1.3 million shares during the first quarter to own almost 18 percent of Carvana at the end of March, when the stock was already down almost 50 percent for the year.

But Tiger Global, then Carvana’s fourth-largest holder, was catching a falling knife. Carvana shares kept tumbling, contributing to Tiger Global’s 50 percent loss by June 30. By that time, Tiger Global had sold 98 percent of its stake, and the analyst covering Carvana soon left the firm.

A number of other hedge funds also sold out during the second quarter, including Sachem Head, Sculptor Capital, Moore Capital, Bridgewater Associates, Paloma Partners, and Caxton Associates.

Meanwhile, Carvana has been the best performing short in 2022, on percentage terms, with a 323.77 percent gain, according to IIhor Dusaniwsky, managing director of predictive analytics for S3 Partners. Short sellers have made $4.2 billion in marked to market gains on Carvana this year, making it the fifth most profitable short in dollar terms.

Cohodes says he is still short the stock, which closed at $7.36 Tuesday, down 97 percent for the year.

“It has more than made my year,” Cohodes said.