Why Goldman Sachs Just Added CarMax To Its 'Conviction List'

Shares of CarMax, Inc KMX were trading slightly higher on Monday after analysts at Goldman Sachs added the name to the firm's "Conviction List' which consists of investment ideas that offer a higher potential return.

Shares sold off during the day and recently traded down about 1 percent.

Analyst Matthew Fassler noted that CarMax could see double-digit growth in core retail EBIT and earnings per share in its second quarter and carry over through the remainder of the year.

"We view CarMax as one of the best retail growth stories of this era, a genuine disruptor that we expect to remain in growth mode even as some other retail unit growth stories fall victim to ecommerce encroachment or vendor disintermediation, or see their growth slow," Fassler wrote. "We see the recent dislocation in the share price as an opportunity to build positions in a retailer offering durable long-run unit growth and currently benefiting from a powerful product cycle."

Fassler continued that shares of CarMax have fallen as of late which creates a "more appealing" entry point. The analyst added that the dip in shares are attributed to concerns about dealer gross profit trends in the marketplace in addition to increased regulation of auto finances.

However, Fassler argued that these negative trends offer no challenges to the CarMax thesis. He explained that CarMax does not deploy mark-ups and takes payment instead on a flat fee basis and won't be affected by the CFPB's settlement with Honda which limited mark-ups of loans by dealers.

In addition, Fassler noted that CarMax's increased transparency (i.e., the customer sees the same screen as the sales associate) adds to its differentiation strategy.

Finally, CarMax is "one of the best" companies within the analyst's coverage at gathering and deploying data and the company is expected to begin leveraging its "extensive" customer data to offer a more personalized experience, both online and through e-mail campaigns.

Shares were reiterated with a Buy rating and unchanged $78 price target.