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. 

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).

Our Methodology

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.”

5. AutoNation Inc (NYSE:AN)

Market cap as of March 24: $5.93 Billion
Number of Hedge Fund Holders: 34

AutoNation, Inc. (NYSE:AN) is a US-based automotive retailer that provides a diverse array of automotive products and services such as new and used vehicles, parts, maintenance, repair services. AutoNation, Inc. (NYSE:AN) operates 247 stores with 343 new vehicle franchises, mainly in the Sunbelt region, along with 55 collision centers, 13 used vehicle stores, 4 automotive auction operations, and 3 parts distribution centers under the AutoNation brand.

Guggenheim analyst Jonathan Elias increased his price objective on AutoNation, Inc. (NYSE:AN) to $181 from $169 and maintained a ‘Buy’ rating on February 21 after the company reported better-than-expected Q4 earnings.

Black Bear Value Partners commented on AutoNation, Inc. (NYSE:AN) in its Q4 2021 investor letter:

“AutoNation is an example of what can happen when you marry excellent business operations with best-in-class capital allocation. Mike Jackson and his team have been able to reinvest in the business, grow ancillary businesses, and acquire new dealerships all while buying back TONS of stock when the opportunity presents itself (27% of the company over the trailing 12 months ending 9/30). Other companies should take notice and use AutoNation as a case study in compounding value for shareholders while also being great corporate citizens. Auto dealers have been over-earning on car sales due to a lack of inventory from the semiconductor shortage. It seems obvious that when the semiconductor shortage is resolved, more cars will become available and unit profitability will be reduced. In short, their earnings will likely decline in the 12 months following the inventory shortage and then resume their rise. Our longer-term horizon allows us the ability to own the business and not focus on a short-term issue. The semiconductor issue is likely to persist thru 2022 though this is a guess. Ultimately our long-term thesis on the business remains intact. If the business can extend its moat, maintain its pricing power, and remain important to both its customers and suppliers we will do fine. Over the last 12 months ending September 30, 2021, the company has bought back 27% of the shares at a cost of ~$81.50. Given the stock has been trading at $100+ it has been a good investment on a mark-to-market basis. More importantly, we own 27% more of the company without having to lay out a single dollar of cash. It has a dramatic impact on my estimates of free cash flow on a per-share basis. Looking forward the Company should be able to generate $10-$14 per year in free cash flow which means we likely own it somewhere between an 8-12% yield. Additionally, if AutoNation achieves modest levels of success with AutoNation USA (new used-car supercenters) it could add another $6-$12 of per-share value to the business. Note that at current prices, very little in the way of AutoNation USA’s success is priced in.”

4. Carvana Co. (NYSE:CVNA)

Market cap as of March 24: $1.48 Billion
Number of Hedge Fund Holders: 36

Carvana Co. (NYSE:CVNA) operates a US e-commerce platform for buying and selling used cars. Customers can research, inspect, finance, purchase, and schedule delivery or pick-up using the company’s technology via desktop or mobile devices. Carvana Co. (NYSE:CVNA) shares have offered investors more than 76% in returns year-to-date.

Evercore ISI analyst Michael Montani increased his price target on Carvana Co. (NYSE:CVNA) to $10 from $9 and maintained an ‘In Line’ rating on the stock after the company pre-announced Q1 results and proposed a debt swap to restructure its balance sheet.

Hedge funds tracked by Insider Monkey having stakes in Carvana Co. (NYSE:CVNA) decreased to 36 in Q4 from 43 in the preceding quarter. These stakes hold a consolidated value of $209.84 million. Spruce House Investment Management is a significant shareholder in the company, with 10 million shares valued at $47.40 million.

Saga Partners specifically reported on Carvana Co. (NYSE:CVNA) in its second half 2022 investor letter:

“I have discussed Carvana Co. (NYSE:CVNA) several times since we first purchased it in 2019 but want to provide an update given the stock’s decline and negative headlines. Historically, Carvana has grown gross profits at a faster rate than operating costs. In 2021, Carvana grew retail unit volumes 74% to over 400,000 cars to become the second largest used car dealer after CarMax. Carvana reached $1.9 billion in gross profits, EBITDA breakeven, and expectations entering 2022 were for continued unit volume growth and scale operating costs.…” (Click here to read the full text)

3. CarMax, Inc (NYSE:KMX)

Market cap as of March 24: $9.08 Billion
Number of Hedge Fund Holders: 38

CarMax, Inc. (NYSE:KMX) is a U.S.-based company that sells used vehicles through its 240 locations. The company has two segments: CarMax Sales Operations and CarMax Auto Finance. In the previous year, the company sold over 900,000 cars to consumers.

CarMax, Inc. (NYSE:KMX), a major player in the used-car market, experienced a decline in sales and net income in the three months ending in November, with vehicle sales falling 21% to 180,000 and net income dropping 86% to $37.6 million. CarMax, Inc. (NYSE:KMX) is being cautious in acquiring cars and trucks due to declining prices, having purchased 40% fewer vehicles in its most recent quarter compared to the previous year.

JPMorgan analyst Rajat Gupta reduced his price target on CarMax, Inc. (NYSE:KMX) from $60 to $55 and maintained an ‘Underweight’ rating on the stock. He expects CarMax’s fiscal Q4 results to be below consensus due to continued challenges in the used car market, with high prices and rising rates affecting demand.

The number of hedge funds tracked by Insider Monkey with interests in CarMax, Inc (NYSE:KMX) increased from 25 hedge funds in the third quarter to 38 hedge funds in the fourth quarter.

Weitz Investment Management commented on CarMax, Inc. (NYSE:KMX) in its fourth quarter 2022 investor letter:

“Unfortunately, the performance story of the year is told by the Fund’s detractors. Higher financing costs and volatile vehicle prices have wreaked havoc on all used car sellers, but CarMax, Inc. (NYSE:KMX) shares have been doubly hit as management continues to invest in capabilities that improve the used car buying experience both online and “on the lot.”

Meta, Alphabet, Amazon and CarMax were all top detractors for the quarter and calendar year periods (FIS and Liberty Broadband, respectively, complete the quarterly and calendar-year detractor lists.) To varying degrees, each is managing through cyclical challenges during a period of substantial investor pessimism. Drawdowns of this magnitude are painful, and it may be prudent for management to moderate the pace of some investments, but we remain encouraged by their long-term focus. In the short run, cutting spending indiscriminately to “defend earnings” may lessen the pain of a drawdown, but it seldom grows a company’s business value — the ultimate prize. We added to both CarMax and Meta on weakness, and all four remain core holdings.”

2. Lithia Motors (NYSE:LAD)

Market cap as of March 24: $5.77 Billion
Number of Hedge Fund Holders: 40

Lithia Motors, Inc. (NYSE:LAD) is a major US automotive group with 282 stores in 28 states, offering 48 brands of new vehicles and all brands of used cars. One of LAD’s competitive advantages is that it also provides services such as auto financing, giving customers an advantage in finding their ideal vehicle.

Lithia Motors, Inc. (NYSE:LAD) recently acquired Jardine Motors Group in the UK, adding over $2.1 billion in annualized revenue to its expanding portfolio. Lithia aims to generate $50 billion in revenues and $55-$60 in earnings per share by 2025 through strategic acquisitions. With a diversified product mix and multiple streams of income, the company is well-positioned for long-term growth despite current macroeconomic challenges. Additionally, Lithia Motors, Inc. (NYSE:LAD) offers convenient digital services and has an expanding physical network, serving 2% of consumers.

At the end of Q4 2022, 40 hedge funds owned a stake in Lithia Motors (NYSE:LAD), down from 45 in the preceding quarter. Abrams Capital Management held a significant stake in Lithia Motors (NYSE:LAD) at the end of the fourth quarter of 2022, worth $481.4 million.

Oakmark Funds mentioned Lithia Motors (NYSE:LAD) in its Q1 2022 investor letter. Here is what the fund said:

“As is typical during periods of significant volatility, we added a new name to the portfolio. Lithia Motors (NYSE:LAD) is the largest franchised auto dealer group in the United States. The company has a long history of creating shareholder value through best-in-class operations and consistent acquisitions of smaller dealers at attractive returns. There is a long runway for management to continue creating value through such acquisitions. Management believes this will drive earnings per share to more than $50 by 2025, even as car prices return to pre-pandemic levels. Meanwhile, Lithia has a significant opportunity to further accelerate growth through Driveway, its online auto retailing platform. We believe Lithia’s existing nationwide infrastructure provides Driveway with significant competitive advantages in e-commerce, which smaller dealers will struggle to replicate. Driveway is not generating any earnings today, but it could become a major contributor over the next five to seven years. With the stock priced at less than 7x management’s 2025 EPS target and with substantial future growth potential from Driveway, we believe Lithia shares are a bargain today.”

1. Copart, Inc. (NASDAQ:CPRT)

Market cap as of March 24: $33.28 Billion
Number of Hedge Fund Holders: 48

Copart, Inc. (NASDAQ:CPRT) offers vehicle remarketing and online auctions services in 11 countries including the United States, Canada, and the United Kingdom. Its online platform utilizes innovative technology to connect buyers and sellers from all over the globe. Copart, Inc. (NASDAQ:CPRT) is headquartered in Dallas, Texas, and runs over 200 locations with a daily inventory of more than 175,000 vehicles up for auction. The main clients of Copart are insurance companies which aim to sell their damaged vehicles at the maximum value possible.

Guggenheim analyst Jonathan Elias increased his price target on Copart, Inc. (NASDAQ:CPRT) to $82 from $75 and maintained a ‘Buy’ rating on the shares on February 22. Steve Cohen’s Point72 Asset Management is the leading shareholder of Copart, Inc. (NASDAQ:CPRT), with a stake worth over $155.62 million.

According to Insider Monkey’s database, 48 hedge funds were long Copart, Inc. (NASDAQ:CPRT) as of Q4 2022. The total value of their holdings was $799.07 million. Copart, Inc. (NASDAQ:CPRT) tops the list of 10 best used car stocks to buy according to hedge funds.

Andvari Associates commented on Copart, Inc. (NASDAQ:CPRT) in their Q4 2022 investor letter:

“Willis Johnson founded Copart, Inc. (NASDAQ:CPRT) as an auto salvage business in 1982 and the company is now the largest auctioneer of damaged and totaled vehicles in the world. It sells more than 3.5 million vehicles per year and operates more than 250 locations in 11 countries. It lists 250,000 vehicles for auction every day.

Copart’s primary customers are auto insurance companies. This would be the GEICOs, the Progressives, the State Farms, and many others around the world. When a policy holder’s car is damaged, the insurance company makes a determination of whether to repair the car or to consider it totaled and pay the owner the value of the car. The insurance company will total the car if repair costs outweigh the preaccident value of the car. If they total the car, the insurance company writes a check for the pre-accident value of the car and then uses Copart to auction the car to salvage any remaining value…” (Click here to read the full text)

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Disclosure: None. 10 Best Used Car Stocks To Buy According to Hedge Funds is originally published on Insider Monkey.