Why CarMax Stock Zoomed Nearly 19% Higher in June

CarMax's (NYSE: KMX) summer started off well, with impressive stock performance despite a quarterly earnings report that, at least initially, wasn't well received. After analysts piled in with a clutch of price target raises and even a recommendation upgrade, the vehicle retailer's stock started heading north again. A series of insider buys also lifted confidence in the stock, and it exited June up by almost 19%.

Stop and start

That earnings release was published on June 17, and, at least outwardly, CarMax did well against expectations. Net revenue was just over $8 billion in its first quarter of fiscal 2027, for a year-over-year gain of 6%. Net income under generally accepted accounting principles (GAAP) fell by 12%, however, to $186 million, or $1.31 per share.

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Despite the bottom-line decline, both metrics handily beat the consensus analyst estimates. On average, pundits tracking the auto retailer's stock were modeling revenue of less than $7.4 billion and GAAP net income of only $0.96 per share.

CarMax was a victim of timing, to an extent. As encouraging as some of the retailer's metrics were, they came at a time of persistently high gasoline prices, driven mostly by this country's conflict with Iran. Most of the models sold by the company are gas-consuming internal combustion engine (ICE) ones.

Also in mid-June, speculation grew that the U.S. Federal Reserve would raise interest rates; if that occurs, auto loans will become more expensive and will likely negatively affect the car market (and, more directly, squeeze the company's proprietary lending arm, CarMax Auto Finance).

Yet the reactions of analysts tracking CarMax stock were in stark contrast to those of investors selling their shares after the quarterly results were published. A clutch of them raised their price targets on CarMax, with one, Jeff Lick of Stephens, going so far as to upshift his recommendation on the stock. For him, it's now an overweight (read: buy), one notch up from his previous equalweight (hold). He also substantially raised his price target to $66 per share from the preceding $43.

The inside scoop

The bullishness in the stock stemming from those analyst moves was exacerbated by a series of insider stock purchases. The most notable buyer was CEO Keith Barr, who purchased 9,400 CarMax shares on June 22. Four members of the company's board of directors also opened their wallets for this purchase, collectively snapping up 14,674 shares.

I feel the immediate sell-off was unjustified; even if profitability declined, that sales growth figure was encouraging, and management seems to be implementing its new "four pillar" business strategy well. The only major concern I would have is gas prices; if they stay lofty, I'd worry that the mega-dealership could take some hits.

Eric Volkman has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends CarMax. The Motley Fool has a disclosure policy.