BANK 5018 (SP2, 2021)
How CarParts.com Managed to Beat Top Auto Companies amidst a Pandemic
Market anomalies are defined as an occurrence in the market where the actual results are different from the expectations of a predictive model or analysis (Latif et al., 2011). Anomalies serve to counter assumptions and models that are not as true in practice as it would have been predicted. Efficient market hypothesis (EMH) is used to identify market anomalies, usually involving distortions in returns contrary to predictive patterns (Salas-Molina et al., 2021). In this report, the small cap effect, where smaller companies outperform larger organizations, is evident as CarParts.com outperformed larger players in the industry to attain a 90% growth.
CarParts.com posted a $119.7 million earnings in its report, a 90% revenue growth from the expected $92 million estimated by market analysts (Bowman, 2021). Consequently, its stocks prices rose significantly against all finance market predictions. Since early 2019, the company made a management change that has defined its path ever since, combining all of its brands under a single nameplate. The company also added new distribution locations to make deliveries quicker and shut down all unprofitable business lines. For larger companies in the auto industry, revenue reduced significantly since 2020 as consumers battled an uncertain future over the COVID-19 pandemic.
Neoclassical Finance Explanations of the Anomaly
In neoclassical finance, the pillars of the concept include efficient markets, the principle of asset pricing, and risk neutral pricing and the no arbitrage market concept. In the case of CarParts.com outperforming more established and larger firms in 2020 and so far in 2021 (Bowman, 2021), neoclassical finance provides that efficient markets include a set of hypotheses that explain the intuition that information available players in a market will be captured in asset pricing (Ross, 2002).
Neoclassical Finance Explanations of the Anomaly…
The theory provides that prices are directly related to the actions of agents. In this theory, analysing markets does not provide enough information for participants to act. The neoclassical theory suggests that the preferences of consumers are invariant in relation to their consumption.
The Behavioural Finance Explanations of the Anomaly
The behavioural finance explanation to CarParts.com puzzling revenue growth compared to its larger competitors is explained with the theory that individual preferences and consumption are dependent on reference points. According to Angner & Loewenstein (2007), reference point is equal to a consumer’s current endowment. Behavioural finance looks at consumption as a function of reference point. Individual consumers are opposed to negative departures from reference points. It is also true that they would prefer positive departures.
The Behavioural Finance Explanations of the Anomaly…
Behavioural finance theories portray a pattern that may be depicted as kink in indifference curves and value function at the consumers’ current endowment points (Angner & Loewenstein, 2007). Loss aversion can be, therefore, used to explain how consumers (currently) prefer to keep cars in their possession, performing minor repairs, as opposed to buying new cars with the uncertainties and market unpredictability of the COVID-19 period. This can explain the anomaly in revenue growth for CarParts.com.
I find the behavioural finance position to be a better interpretation of the CarParts.com market anomaly. The principles of the behavioural finance theories best capture the reality of the matter, explaining why the company experienced a 90% increase in revenue from 2019 to 2021. The position that people act according to their reference points is true. One of the notable reference points that propelled CarParts.com is the reality of the COVID-19 pandemic and the consumers’ realization of the fact that there are so many uncertainties requiring more saving than spending. As a result, using what was already in their possession rather than acquiring more assets was logical. In this occurrence, CarParts.com benefited by selling more parts to information-rich consumers.
Manifestation of Market Anomalies/Puzzles
The COVID-19 pandemic has created unique market conditions that have not been witnessed in the recent past. As a result, anomalies and puzzles in the market are likely to happen outside of capital markets.
Manifestation of Market Anomalies/Puzzles
Some of the areas likely to experience anomalies include:
The corporate world
The technology industry
In the tourism, travel, and hospitality sector
In the financial services sector as more tech companies enter the market
Examples of Likely Market Anomalies
New players in the financial services sector such as Stripe are likely to outdo larger firms such as Skrill, Payoneer, and PayPal. As the financial services market expands due to the need to work online and from home, new entrants will come up with better functionality and offerings, leading to more consumption of their products.
Domestic companies operating in the tourism, travel, and hospitality sector are outdoing larger conglomerate as they have better markets at home amidst the international travel restrictions during the pandemic
New entrants in e-commerce market such as WayFair are likely to outdo established brands such as eBay as the smaller firm has more specialized goods and has fair pricing and better regulation.
Angner, E., & Loewenstein, G. (2007). Behavioral economics. Handbook of the philosophy of science: Philosophy of economic, 641-690.
Bowman, J. (March 10, 2021). Why CarParts.com Is Set to Beat the Market Again This Year. The Motley Fool. Available at https://www.fool.com/investing/2021/03/10/the-simple-reason-carpartscom-will-beat-the-market/
Latif, M., Arshad, S., Fatima, M., & Farooq, S. (2011). Market efficiency, market anomalies, causes, evidences, and some behavioral aspects of market anomalies. Research journal of finance and accounting, 2(9), 1-13.
Ross, S. A. (2002). Neoclassical finance, alternative finance and the closed end fund puzzle. European Financial Management, 8(2), 129-137.
Salas-Molina, F., Pla-Santamaria, D., Mayor-Vitoria, F., & Vercher-Ferrandiz, M. L. (2021). A Multicriteria Extension of the Efficient Market Hypothesis. Mathematics, 9(6), 649.