What happened

Shares of digital automotive marketplace Cars.com (NYSE: CARS) opened higher and rose 12% through 10:20 a.m. EDT in early trading on Wednesday. There appear to be two catalysts driving the stock today.

So what

First and less significantly, Cars.com co-founder Thomas Vetter informed the Securities and Exchange Commission on Tuesday that on Monday, he purchased 12,000 shares of his company’s stock at $8.50 per share. Although this is a positive development from its shareholders’ point of view (i.e., an insider expressing confidence in the stock’s value), the increase in Vetter’s stake in the company is marginal, at just 1.6% of his total holdings.  

Second and more importantly (although less recent), Car and Driver magazine has reported on the continuing demand for used cars as commuters seek to socially distance themselves, rather than riding on crowded public transit or using ridesharing services such as Uber and Lyft.  

According to the article, used car sales were up 9% year over year in May and June, and June used car sales in particular were at the highest level seen in any month since 2007.

45 degree canted view of a full car lot.

Image source: Getty Images.

Now what

Even if Cars.com doesn’t sell cars itself, it does run advertisements for their sale, and so demand for used cars is obviously a good thing for the company. Taken in combination with the insider buying, this may explain why investors are getting excited about the stock today.

Savvy investors should, however, be aware that despite the increased popularity of used cars, Cars.com remains deeply unprofitable, losing $1.2 billion over the past 12 months — with a loss in each of the past six quarters. That fact, in combination with the very modest size of the insider purchase, suggests to me that this particular stock rally could be a lemon.

Caveat emptor.

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

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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