Carvana’s Woes Saddle Hedge Fund CAS With Unprecedented 43% Loss
Carvana’s Woes Saddle Hedge Fund CAS With Unprecedented 43% Loss
(Bloomberg) -- CAS Investment Partners’s huge bet on Carvana Inc. is backfiring in a big way.
Its hedge fund, run by Clifford Sosin, has lost 43% this year, according to an investor letter seen by Bloomberg. The Sosin Partners fund makes concentrated bets on about eight stocks and had a quarter of its capital invested in Carvana as of the end of March. Shares of the troubled online platform for buying used cars tumbled 10% Friday, extending their decline this year to 75%.
“Carvana’s challenges, especially when coupled with the precipitous decline in its stock price, clearly seem terrifying,” Sosin wrote in the Friday’s letter. However, “I believe that in due time we will look back at them as bumps in the road on the company’s path to success.”
Sosin, 40, declined to comment. His Westport, Connecticut-based firm manages about $2.2 billion, including leverage, according to regulatory filings.
Once a pandemic darling, Carvana has fast fallen out of favor. Its first-quarter results revealed a deepening cash burn, stemming from surges in used-vehicle prices and capital spending.
It also struggled to raise $3.3 billion in the corporate debt market and had to revamp a junk-bond offering. Those new bonds fell in their first day of secondary trading even after Apollo Global Management Inc. swooped in to buy roughly half of the sale.
For CAS, 2022 is a stark contrast to its previous performance. Its fund hasn’t had a down year since launching in October 2012, and in 2020 it returned a record 96.5%.
In the 25-page letter that almost entirely focused on Carvana, Sosin acknowledged its weak unit volume, but said it should accelerate when the industry normalizes. He added that the company should generate profits of $100 million annually from its acquisition of Adesa Inc.’s U.S. car-auction business, which was financed with this week’s debt offering.
“Carvana has a great deal of latent margin potential,” Sosin wrote. “This potential should allow the company to pursue its growth ambitions, albeit at a slower pace of expansion, without meaningfully accessing the capital markets or counting on a significant used-vehicle industry recovery.”
As big as CAS’s losses are, the billionaire father-son duo behind Phoenix-based Carvana are faring even worse.
Ernie Garcia II and Ernie Garcia III have lost almost $14 billion combined so far this year, according to the Bloomberg Billionaires Index. The younger Garcia, the company’s chief executive officer, has lost about 73% of his net worth since the start of 2022.
The senior Garcia began selling Carvana shares in late October 2020 as they climbed to around $200 each from their pre-pandemic level of about $90. The stock closed Friday at $57.96.
“If Carvana works out as well as it could, they might be among the richest people on the planet,” Sosin told Bloomberg in a 2019 interview.
Three years since that remark, he said the company still has a bright future.
“I am not immune to mistakes, and I promise that when I eventually make a doozy I will put it here at the top of this letter,” Sosin wrote. “In this case, however, I do not believe I have.”
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