Vroom Inc. (NASDAQ: VRM) has experienced an impressive surge in its stock price, soaring over 285% in less than two months since the end of May. However, the real intrigue lies in the significant surge of interest observed during intraday trading on July 19, 2023. Notably, this surge occurred without any accompanying press releases or SEC filings, leaving investors to ponder what catalysts could have fuelled a remarkable 28% gain in the stock.

What happened:
Upon conducting a thorough analysis, it has come to light that Vroom Inc. (NASDAQ: VRM) has garnered attention from retail investors as a notable “Sympathy Play.” Surprisingly, the significant surge witnessed in Vroom’s stock today is not directly linked to any specific development within the company itself. Rather, it appears to be influenced by the performance of a direct competitor, Carvana Co. (NYSE: CVNA), highlighting the interconnected nature of these market dynamics.
To provide further context, let’s first explore the similarities between the two companies before delving into the concept of, “Sympathy plays”.
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Similarities between Vroom Inc. (NASDAQ: VRM) and Carvana Co. (NYSE: CVNA)
Vroom and Carvana are both prominent online marketplaces for buying, selling, and trading used vehicles. Both platforms prioritize offering accident-free vehicles with clean titles, provide similar services, and have comparable pricing. Carvana offers the additional convenience of physical “vending machine” locations for vehicle pick-up, while Vroom operates exclusively online. When considering warranties, returns, and customer reviews, Carvana generally holds an advantage with higher ratings.
Vroom, on the other hand, is poised for continued growth and market expansion. With a projected average annual growth rate of 23% over the next three years, Vroom outpaces the growth forecast of 6.3% for the Specialty Retail industry in the US. This demonstrates Vroom’s strong potential and ability to capture an increasing share in the market.
Sympathy Plays:
A sympathy play in stocks refers to a trading strategy based on the reaction of a stock to significant news from a competitor company. When a company releases notable news that positively impacts its stock price, investors often anticipate similar effects on competitor companies. For instance, if Ford surpasses earnings expectations due to strong consumer demand for cars, its stock price may rise. Investors may also expect competitors like GM to benefit from the same demand and outperform earnings estimates.
As a result, the stock price of GM may increase as investors adjust their expectations. Traders can take advantage of this sympathetic movement by either riding the upward momentum or speculating on a reversal if they believe GM will underperform.
It’s important to note that Carvana Co. (NYSE: CVNA) announced a debt reduction agreement today of over $1.2 billion, leading to a change in its earnings date. The agreement eliminates more than 83% of Carvana’s 2025 and 2027 unsecured note maturities, resulting in a $430 million annual reduction in cash interest expenses for the next two years and providing increased financial flexibility.
This announcement is widely believed to have had a significant impact on Vroom Inc. (NASDAQ: VRM) and has contributed to the heightened volatility observed in today’s trading session.
Recognizing a Sympathy Play:
Preparing for sympathy plays involves staying informed about market news and identifying relevant announcements that can impact both the company at the center of the news and its competitors or sector. Here’s a breakdown of the process:
- Recognizing Sympathetic Price Movements: Stay updated on market news and be alert for significant announcements that can create sympathetic price movements. These announcements should not only affect the focal company but also have relevance for its competitors or the broader sector.
- Understanding the Nature of the News: Assess the nature of the news and determine if it signifies a substantial catalyst that can benefit or harm the company’s competitors. If the news indicates a lasting impact and deeper trends, it could lead to sustained multi-day price movements across the sector. However, if the news is transient or lacks deeper implications, resulting sympathetic price movements might be short-lived.
- Identify Candidates in Advance: To be well-prepared, proactively identify candidate stocks for potential sympathy plays. Start by listing companies within the same sector as the focal company. Additionally, research past price movements during earnings announcements to identify correlations and patterns of stocks rising and falling together.
- Build Sympathy Play Watchlists: Compile lists of sympathetic stocks across multiple sectors. This way, when a significant announcement occurs, you will have a ready-made watchlist of stocks to monitor for potential sympathy plays. This proactive approach allows you to react swiftly to emerging opportunities.
By recognizing sympathetic price movements and maintaining watchlists of potential candidates, you can increase your preparedness and agility in taking advantage of sympathy plays as they arise in the market.
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