10 Best Used Car Stocks To Buy According to Hedge Funds
In this article, we discuss 10 best used car stocks to buy according to hedge funds. If you want to skip the detailed analysis of the used cars industry, go directly to 5 Best Used Car Stocks To Buy According to Hedge Funds.
The used car market is surprisingly large and is growing at a remarkable pace. As we reported earlier, the used car market was valued at $260 billion in 2021, and is expected to reach $460 billion by 2027, registering an expected CAGR of over 10% during this period. The U.S. used car market is more than twice as large as the new car market in terms of unit sales. And it continues to grow.
Demand for used cars soared as supply of new cars diminished as a result of auto plants shutting down because of the COVID-19 pandemic disruptions. When auto factories began to reopen, they ran into an acute chip shortages that derailed their production plans. New car inventories nearly halved due to production disruptions and supply chain challenges. The limited supply drove new cars prices about 20% from pre-pandemic levels.
Without enough new cars on the market, many people turned to secondhand cars. The strong demand drove used car prices 45% above pre-pandemic levels. In fact, some used car models commanded higher prices than when they were new.
But used car prices have retreated from their peak and that has left many wondering whether the industry’s boom is over. If you look closely, you will notice that while used car prices may drop a bit, the downside is limited considering the auto sector situation.
First, automakers are still producing fewer cars. Supply chain challenges forced global automakers to shrink production by about 15 million in 2021 and 2022. The chip supply that has disrupted auto production in recent years remains an issue. For example, Toyota and Nissan are among the automakers that have been forced to continue curbing production because they can’t obtain enough chips. As a result, global auto production is expected to drop by up to 3 million vehicles in 2023. That will keep many people turning to the used car market due to limited inventory of new cars.
Second, automakers are prioritizing production of high-end profitable models. As a result, people looking for cheap cars have to go shopping in the used car market. High interest rates are also making it difficult for people to afford the high-end cars that automakers are focused on producing.
A limited supply of new cars also means a low supply in the used market, which can support strong prices.
According to Cox Automotive, wholesale prices for used vehicles dropped 15% in 2022. But the price decline will ease in 2023 to just 4.3%. Cox expects used car prices to rise 4.1% in 2024. Jonathan Smoke, the Chief Economist of Cox Automotive, stated that while it's improbable for used car prices to return to their pre-pandemic levels, there are signs of the market stabilizing by the latter half of 2023.
The used car market is experiencing a drop in prices after peaking in early 2022. J.P. Morgan's Lead Automotive Equity Research Analyst, Ryan Brinkman, believes that increased new vehicle production and dealer inventory will drive the reversal of used car pricing.
Photo by Parker Gibbs on Unsplash
The Manheim Used Vehicle Value Index in the US, which measures dealership auction prices for used cars, has fallen to 222.5 in January 2023 from its high of 257.7 in January 2022. J.P. Morgan Research predicts a 10% decline in used car prices in 2023 due to high prices, poor selection, and declining demand, with a deteriorating macro outlook affecting consumer sentiment. Brinkman suggests that recovery in 2023 could be quicker, with pricing normalization, but the possibility of an economic downturn is a wildcard.
The major players in the used car industry that investors should pay special attention to include CarMax, Inc. (NYSE:KMX), Carvana Co. (NYSE:CVNA), and AutoNation, Inc. (NYSE:AN).
We scanned Insider Monkey's database of 943 hedge funds and picked the top 10 used car stocks based on hedge fund popularity, which means the stocks listed in the article have the highest number of hedge fund investors as of the end of the fourth quarter of 2022.
10. CarGurus, Inc. (NASDAQ:CARG)
Market cap as of March 24: $2.13 Billion
Number of Hedge Fund Holders: 21
CarGurus, Inc. (NASDAQ:CARG) runs an online automotive marketplace for purchasing and selling new and used cars globally, with two segments: U.S. Marketplace and Digital Wholesale. CarGurus, Inc. (NASDAQ:CARG) operates online marketplaces under various brands
On March 1, Raymond Jaingmes upped CarGurus, Inc. (NASDAQ:CARG)'s price target to $20 (from $16) and maintained an 'Outperform' rating.
CarGurus, Inc. (NASDAQ:CARG)'s total revenue for 2022 was $1,655 million, a 74% increase compared to 2021. For the first quarter of 2023, CarGurus, Inc. (NASDAQ:CARG) expects total revenue to be between $195 million to $215 million, non-GAAP Consolidated Adjusted EBITDA to be between $19 million to $27 million, and non-GAAP EPS to be between $0.17 to $0.19. These estimates are based on market behaviors and industry conditions.
According to the Insider Monkey database, 21 hedge funds held stakes in CarGurus, Inc. (NASDAQ:CARG), with a combined value of $245.5 million in Q4 2022. The most notable shareholder in CarGurus, Inc. (NASDAQ:CARG) is PAR Capital Management, with 6.75 million shares worth $94.5 million.
Like CarMax, Inc. (NYSE:KMX), Carvana Co. (NYSE:CVNA), and AutoNation, Inc. (NYSE:AN), CarGurus, Inc. (NASDAQ:CARG) is one of the most popular used car stocks among smart investors.
In their investor letter for Q3 2022, Cove Street Capital stated the following regarding CarGurus, Inc. (NASDAQ:CARG):
“During the quarter, we started a new position in CarGurus, Inc. (NASDAQ:CARG). The company historically has been a lead generation business, helping car dealers find consumers who are looking to buy or sell a car online. CARG has been successful at this by having world-class search engine optimization (SEO) and search engine marketing (SEM) that helps them achieve top search results on Google. Consumers click these top links on Google when buying or selling a car and enter their information on the CARG website, generating a lead for CARG. CARG sells these high-quality leads to dealers for a significant profit (gross margin of 90%+). The lead generation business has hit maturity as CARG has almost penetrated the entire car dealer market in the US. CARG recently bought an Online Dealer to Dealer (D2D) platform, CarOffer, which helps car dealers sell cars to other dealers as well as buy cars from consumers online. There is a large amount of selling synergies between the Online D2D platform and the legacy lead generation business as they are selling to the same customer base: car dealers. CarOffer has been experiencing huge growth as it gains significant market share from physical dealer auctions. We have initiated a position in CARG after the market over punished the stock due to a tough macro environment. Despite the current macro concerns, we feel CARG is still a high margin, high free cash flow generating business with significant room to grow the CarOffer business.”
9. Sonic Automotive, Inc. (NYSE:SAH)
Market cap as of March 24: $1.81 Billion
Number of Hedge Fund Holders: 22
Sonic Automotive, Inc. (NYSE:SAH) operates as an automotive retailer in the US with three segments: Franchised Dealerships, EchoPark, and Powersports. The Franchised Dealerships segment sells new and used cars, provides maintenance and repair services, and offers extended warranties, financing, insurance, and other aftermarket products. The EchoPark segment sells used cars and provides finance and insurance products in pre-owned vehicle retail locations. Finally, the Powersports segment sells new and used powersports vehicles and offers finance and insurance services.
Sonic Automotive, Inc. (NYSE:SAH) operates 111 franchises and 52 used car superstores, primarily in the Southeastern US, California, and Texas. Sonic aims to expand its EchoPark segment, which sells high-quality one- to four-year-old vehicles at no-haggle prices up to $3,000 below competitors. Sonic Automotive, Inc. (NYSE:SAH)'s scale and cash flow allow it to invest in M&A and other initiatives.
As of the end of the fourth quarter, there were 22 hedge funds in Insider Monkey’s database that held stakes in Sonic Automotive, Inc. (NYSE:SAH), compared to 21 funds in the third quarter. Balyasny Asset Management, with 482,937 shares, is the biggest stakeholder in the company.
8. Penske Automotive Group, Inc. (NYSE:PAG)
Market cap as of March 24: $9.20 Billion
Number of Hedge Fund Holders: 25
Penske Automotive Group, Inc. (NYSE:PAG) is an automotive retailer that offers new and used vehicles from around 40 different brands, in addition to vehicle maintenance and repair services. They also provide third-party finance and insurance products, as well as replacement and aftermarket automotive products.
Penske Automotive Group, Inc. (NYSE:PAG)'s website currently has 9,548 used vehicles available for sale. JPMorgan increased Penske Automotive's price target to $135 from $130 on February 21 and maintained a ‘Neutral’ rating on the stock. Mario Gabelli’s GAMCO Investors is a significant position holder in Penske Automotive Group, Inc. (NYSE:PAG), with 467,833 shares valued at $53.8 million.
Penske Automotive Group, Inc. (NYSE:PAG) had a successful year in 2022, selling over 447,000 new and used vehicles through retail automotive operations and more than 20,000 new and used commercial trucks via commercial truck dealerships.
Q4 also yielded strong results, with a rise in demand for new vehicles boosting sales in both automotive and commercial truck dealerships. On a same-store basis, retail automotive recent unit sales rose by 11%, commercial truck new units by 36%, and service and parts revenue by 6% for retail automotive and 16% for commercial trucks.
At the end of the fourth quarter of 2022, 25 hedge funds in the database of Insider Monkey held stakes worth $320.1 million in Penske Automotive Group, Inc. (NYSE:PAG), up from 24 in the preceding quarter worth $231.18 million. The company stands eighth on the list of 10 best used car stocks to buy according to hedge funds.
7. Asbury Automotive Group, Inc (NYSE:ABG)
Market cap as of March 24: $4.29 Billion
Number of Hedge Fund Holders: 26
Asbury Automotive Group, Inc. (NYSE:ABG) is a large automotive retailer based in Duluth, Georgia, with 139 dealerships and 187 franchises of 31 domestic and foreign vehicle brands. Asbury Automotive Group, Inc. (NYSE:ABG) also runs Total Care Auto, seven used vehicle stores, 32 collision repair centers, an auto auction, and a wholesale business for used vehicles. They offer new and used vehicles, parts and service, repair and maintenance, replacement parts, collision repair, and finance and insurance products.
Over the past 10 years, Asbury Automotive Group, Inc. (NYSE: ABG) has achieved a 120% increase in net income margins and a 5-fold rise in revenues. The expected growth in internet sales is anticipated to play a crucial role in Asbury Automotive Group, Inc. (NYSE:ABG)'s future growth. Clicklane, the company's digital vehicle purchasing platform, has mostly attracted new customers, with 95% of them being first-time buyers. Their five-year growth plan involves organic and acquisitive growth, as well as their Clicklane digital vehicle purchasing platform.
In the fourth quarter of 2022, 26 hedge funds had stakes worth $1.26 billion in Asbury Automotive Group, Inc (NYSE:ABG). In addition, Lauren Taylor Wolfe’s Impactive Capital held 2.20 million shares of Asbury Automotive Group, Inc (NYSE:ABG) shares, valued at $394.87 million, making it the company's most significant stakeholder.
In its Q4 2022 investor letter, Black Bear Value Partners stated the following about Asbury Automotive Group, Inc. (NYSE:ABG):
“Asbury Automotive Group, Inc. (NYSE:ABG) operates auto dealerships across the United States. We have written at length about our affinity for the auto-dealer business. While much attention is paid to the number of cars sold, the strength of the model comes from the back of the house in parts and services where more than 50% of the profits come from. We are exiting a period of high margins on new and used car sales. Shortages of inventory have allowed dealers to make record profits when selling a car. As inventories normalize and interest rates rise, I fully expect the dealers to make less profit (called the GPU) when selling a car. Car prices cannot go up ad-infinitum and at some point, there will be buyer pushback…” (Click here to read the full text)
5. Group 1 Automotive, Inc. (NYSE:GPI)
Market cap as of March 24: $2.92 Billion
Number of Hedge Fund Holders: 30
Group 1 Automotive, Inc. (NYSE:GPI) is an automotive retailer that sells new and used cars, light trucks, and vehicle parts, as well as provides financing, service and insurance contracts, and maintenance and repair services. Group 1 Automotive, Inc. (NYSE:GPI) operates franchises, dealership locations, and collision centers, and trades and sells various brands.
JPMorgan analyst Rajat Gupta raised the price target on Group 1 Automotive, Inc. (NYSE:GPI) to $230 from $220 and kept an ‘Overweight’ rating on the shares on February 21. The analyst said that the company is demonstrating excellent execution, and the UK business is proving to be resilient.
As of the fourth quarter of 2022, 30 hedge funds in Insider Monkey’s database held stakes in Group 1 Automotive, Inc. (NYSE:GPI). Anthony Bozza’s Lakewood Capital Management is the most notable shareholder in Group 1 Automotive, Inc. (NYSE:GPI), with 331,726 shares valued at $59.83 million.
Along with CarMax, Inc. (NYSE:KMX), Carvana Co. (NYSE:CVNA), and AutoNation, Inc. (NYSE:AN), Group 1 Automotive, Inc. (NYSE:GPI) is one of the most popular used car stocks among smart investors.
Here is what ClearBridge Investments said about Group 1 Automotive, Inc. (NYSE:GPI) in its Q1 2022 investor letter:
“We also initiated a new position in Group 1 Automotive (NYSE:GPI), in the consumer discretionary sector. Group 1 Automotive is one of the leading auto dealership groups in the U.S. and the U.K. Through our analysis, we believe the current stock price already discounts a considerable decline in revenue and profits due to concerns about elevated used car prices and high gross margins per unit. However, we believe this does not reflect the underlying strength of the company’s diversified business line and flexible cost structure. Ultimately, we believe the company will prove more durable than the market expects and be a long-term value creator for the portfolio.”
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Disclosure: None. 10 Best Used Car Stocks To Buy According to Hedge Funds is originally published on Insider Monkey.