Tuesday, May 24, 2011

CarMax, Inc (NYSE: KMX) Q3 2011 Price Target

Recent price: 28.82$
P/E Ratio: 17.25
3 Months Target Price: 20$

Company Description
Data acquired from Reuters tells us that CarMax, Inc. is a holding company and its operations are conducted, through its subsidiaries. The Company is a retailer of used cars, which retailed 357,129 used vehicles, during the fiscal year ended February 28, 2010 (fiscal 2010). As of February 28, 2010, CarMax operated 100 used car superstores in 46 metropolitan markets. In addition, it sold 197,382 wholesale vehicles, during fiscal 2010, through on-site auctions. The Company purchases, reconditions and sells used vehicles. In fiscal 2010, approximately 90% of the used vehicles it retailed were 1 to 6 years old with fewer than 60,000 miles. It also offers a line of used vehicles at each superstore that are more than six years old or have more than 60,000 miles.

Confidence Margins
Strong resistance $37.82 (-28%)
Light resistance $35.00 (-21%)
Light support $26.81 (+7%)
Strong support $19,75 (+31%)

Shares of Carmax are very overvalued right now and they seem to be on track to continue in the coming months.

Entry strategy
For the cautious investor:
Sell short the the stock for 28$ or more.

For the risk-taking trader:
The October 2011 28$ out-of-the-money put option contract seems to be the right position to take, they can be acquired for about 230$ per contract.

Exit Strategy
For the cautious investor:
Sell when the stock reaches 20$.

For the risk-taking trader:
The contracts should be kept until the underlying reaches around 20$. This should provide a satisfactory return if the underlying reaches the target price as the contracts will get in the money.

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