In this article, we discuss 10 best used car stocks to buy now.
New car inventory is nearly half of what it should be, and dwindling inventories are an indicator of tight supply and demand. Inventories are low because of COVID-19 production disruptions and supply chain constraints. Inventories will normalize gradually, as automakers are not rushing to overproduce vehicles, especially with the aggressive interest rate environment. According to the Manheim Used Vehicle Index, used car prices are up about 45% from pre-pandemic levels, and Federal Reserve data indicated that new-car prices are up about 20% from pre-pandemic levels.
RBC Capital Markets analyst Joseph Spak wrote in an investor note last week that although auto sentiment is “very poor” due to rampant rate hikes, high prices, low consumer confidence, a looming recession, and a European energy crisis heading into colder months, earnings for the third quarter of 2022 “should mostly be fine,” as market experts focus on management commentary and guidance revisions in the auto sector. He noted that 2023 estimates for the sector need to “move materially lower.”
Although the new and used car industry is going through a rough phase, the auto sector has proven to be resilient over the years and can be a good long-term investment. Used car stocks such as Copart, Inc. (NASDAQ:CPRT), Lithia Motors, Inc. (NYSE:LAD), and CarMax, Inc. (NYSE:KMX) make for smart portfolio additions, especially as they are trading at discounts currently.
Our Methodology
We selected the following used car stocks based on optimistic analyst coverage, strong underlying business fundamentals, and future growth prospects once the auto industry gains momentum. We have assessed the hedge fund sentiment from Insider Monkey’s database of 895 elite hedge funds tracked as of the end of the second quarter of 2022.
Photo by Malusi Msomi on Unsplash
Best Used Car Stocks To Buy Now
10. Sonic Automotive, Inc. (NYSE:SAH)
Number of Hedge Fund Holders: 20
Sonic Automotive, Inc. (NYSE:SAH) was incorporated in 1997 and is based in Charlotte, North Carolina. It operates as an automotive retailer in the United States, with two primary segments – Franchised Dealerships and EchoPark. The Franchised Dealerships segment is involved in the sale of new and used cars and light trucks, replacement parts, vehicle maintenance, manufacturer warranty repair, arrangement of extended warranties, service contracts, financing, insurance, and other aftermarket products for its customers.
On October 6, JPMorgan analyst Rajat Gupta upgraded Sonic Automotive, Inc. (NYSE:SAH) to Overweight from Neutral with a $60 price target. The analyst noted the setup for franchise auto dealers into Q3 earnings is the most negative he has witnessed since the pandemic. He upgraded Sonic Automotive, Inc. (NYSE:SAH) based on his revised price targets for the group.
According to Insider Monkey’s data, 20 hedge funds were long Sonic Automotive, Inc. (NYSE:SAH) at the end of June 2022, compared to 23 funds in the prior quarter. Michael Moriarty’s Teewinot Capital Advisers is the largest stakeholder of the company, with 575,326 shares worth $21 million.
In addition to Copart, Inc. (NASDAQ:CPRT), Lithia Motors, Inc. (NYSE:LAD), and CarMax, Inc. (NYSE:KMX), Sonic Automotive, Inc. (NYSE:SAH) i s one of the best used car stocks to invest in.
9. CarGurus, Inc. (NASDAQ:CARG)
Number of Hedge Fund Holders: 23
CarGurus, Inc. (NASDAQ:CARG) is a Massachusetts-based company that operates an online automotive marketplace where buyers and sellers can trade new and used cars in the United States and internationally. On October 3, CarGurus, Inc. (NASDAQ:CARG) announced that it has chosen Amazon Web Services as its global cloud infrastructure provider. The multi-year deal is expected to allow customers an enhanced experience on the CarGurus website. CarGurus, Inc. (NASDAQ:CARG) is one of the best used car stocks to consider.
On October 18, Truist analyst Naved Khan reaffirmed a Buy rating on CarGurus, Inc. (NASDAQ:CARG) but trimmed the price target on the shares to $31 from $38. The company’s Q3 results are expected to be in-line with his lowered expectations, which largely factor in the negative impact on CarOffer from wholesale price drops and soft retail demand, as per the analyst.
According to Insider Monkey’s data, 23 hedge funds were long CarGurus, Inc. (NASDAQ:CARG) at the end of the second quarter of 2022, compared to 29 funds in the last quarter. Paul Reeder and Edward Shapiro’s PAR Capital Management is the largest stakeholder of the company, with 4 million shares worth $88 million.
8. Group 1 Automotive, Inc. (NYSE:GPI)
Number of Hedge Fund Holders: 24
Group 1 Automotive, Inc. (NYSE:GPI) is a Texas-based company that operates in the automotive retail industry, dealing in new and used cars, light trucks, vehicle parts, service and insurance contracts, vehicle financing, and automotive maintenance and repair services. The shares have gained close to 6% in the last month, making Group 1 Automotive, Inc. (NYSE:GPI) a great prospect for value-oriented investors.
JPMorgan analyst Rajat Gupta on October 6 upgraded Group 1 Automotive, Inc. (NYSE:GPI) to Overweight from Neutral with a $210 price target. The analyst said the sector is not immune to the current macro challenges, and he cut estimates for 2023 “materially” to reflect a mild recession. He believes the auto industry will achieve a new normal by 2025 and upgraded Group 1 Automotive, Inc. (NYSE:GPI) based on his revised price targets for the group.
Among the hedge funds tracked by Insider Monkey, Group 1 Automotive, Inc. (NYSE:GPI) was part of 24 public stock portfolios at the end of June 2022, compared to 25 funds in the earlier quarter. Anthony Bozza’s Lakewood Capital Management is the biggest position holder in the company, with 328,726 shares valued at $55.8 million.
Here is what ClearBridge Investments Small Cap Value Strategy has to say 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.”
7. ACV Auctions Inc. (NASDAQ:ACVA)
Number of Hedge Fund Holders: 24
ACV Auctions Inc. (NASDAQ:ACVA) is a New York-based company that connects buyers and sellers for the online auction of wholesale vehicles. It also provides data services to determine the condition and value of used vehicles, in addition to customer financing services. ACV Auctions Inc. (NASDAQ:ACVA) is one of the leading used car stocks to buy now.
On October 6, Jefferies analyst John Colantuoni maintained a Buy rating on ACV Auctions Inc. (NASDAQ:ACVA) but slashed the price target on the shares to $15 from $17. The analyst trimmed estimates and price targets across U.S. internet in anticipation of a slowing macro environment. However, the correction across the internet sector has created more attractive risk/reward, and ACV Auctions Inc. (NASDAQ:ACVA) offers the most feasible long-term growth profile, contended the analyst.
Among the hedge funds tracked by Insider Monkey, 24 funds were long ACV Auctions Inc. (NASDAQ:ACVA) at the end of the second quarter of 2022, compared to 34 funds in the earlier quarter. Gavin Baker’s Atreides Management is the largest position holder in the company, with nearly 8 million shares worth $52 million.
Here is what Meridian Funds specifically said about ACV Auctions Inc. (NASDAQ:ACVA) in its Q2 2022 investor letter:
“ACV Auctions Inc. (NASDAQ:ACVA) operates a digital wholesale auction marketplace to facilitate business-to-business used car sales between sellers and dealers. It has disrupted the traditional physical used-car auction marketplace by attracting thousands of dealers to its online platform. ACV’s competitive advantage is its sizable team of inspectors and the technology tools supporting this team. The depth and accuracy of ACV’s inspection reports provide buyers the confidence to bid aggressively, knowing that they are unlikely to be negatively surprised post purchase. Sellers are drawn to ACV because of its lower auction fees and large buyer base. Despite a challenging operating environment, ACV reported a 49% increase in first-quarter revenue, which was significantly faster than its physical auction peers, implying robust market share gains. However, sentiment for ACV’s stock cooled amid the company’s aggressive investments in its business, which are likely to result in negative free cash flow for the next few years. Further pressuring the stock were concerns that demand for used cars will decline as supply chain disruptions ease and new car production picks up. Our long-term conviction in the company remains high due to its strong fundamentals, healthy balance sheet, and increasing market share. Furthermore, we believe the sale of ADESA, one of ACV’s largest physical auction competitors, to online used-car platform Carvana could provide a tailwind to ACV. Carvana is viewed by used car dealers as a direct competitor, likely causing them to shift volumes from ADESA to ACV. Based on our favorable long-term outlook for the company, we added to our position during the quarter.”
6. Asbury Automotive Group, Inc. (NYSE:ABG)
Number of Hedge Fund Holders: 27
Next on our list of the best used car stocks is Asbury Automotive Group, Inc. (NYSE:ABG), a Georgia-based automotive retailer that offers a range of automotive products and services, including new and used vehicles, vehicle repair and maintenance services, replacement parts, and collision repair services.
On October 6, investment advisory JPMorgan maintained a Neutral rating on Asbury Automotive Group, Inc. (NYSE:ABG) and lowered the price target on the shares to $185 from $205. Analyst Rajat Gupta issued the ratings update.
According to the second quarter database of Insider Monkey, 27 hedge funds held stakes worth $1.09 billion in Asbury Automotive Group, Inc. (NYSE:ABG), compared to 29 funds in the prior quarter worth $926 million. Lauren Taylor Wolfe’s Impactive Capital is the largest stakeholder of the company, with 2.20 million shares valued at $372.5 million.
Like Copart, Inc. (NASDAQ:CPRT), Lithia Motors, Inc. (NYSE:LAD), and CarMax, Inc. (NYSE:KMX), Asbury Automotive Group, Inc. (NYSE:ABG) is one of the top stocks to consider for exposure to the auto industry.
Here is what LRT Capital Management has to say about Asbury Automotive Group, Inc. (NYSE:ABG) in its Q1 2022 investor letter:
“Asbury Automotive Group is one of the largest automotive retailers in the United States. It operates 90 dealerships consisting of 112 franchises and 25 collision repair centers. The company’s stores offer new and used vehicles, parts, and service, as well as finance and insurance (F&I) products. Franchise agreements controlled by automotive manufactures and state laws create an environment of tightly controlled market entry and restricted competition.
The dealership industry is highly fragmented with 93.5% of dealers having only between 1-5 locations according to data from 2020. In fact, dealers with over 50 locations account for only 0.1% of the industry – a testament to the huge opportunity for consolidation that lies ahead. Industry dynamics, including the rising complexity of automobiles and the need for omnichannel distribution are favoring better capitalized and larger dealer groups. We believe Asbury Automotive Group has several distinct advantages, particularly its highly profitable parts and service business, its overexposure to the luxury vehicle business, which carries the best margins, and its Clicklane omnichannel strategy. Asbury’s management has also been acting in the best interests of its shareholders by allocating capital towards acquiring dealerships to aggressively expand its business, and occasionally repurchasing stock when attractive acquisitions targets could not be found.
ABG is not a fast-growing SaaS business, but when paying a valuation of ¼ of the overall stock market, one does not need to make heroic assumptions about the future to enjoy strong returns as shareholders. We believe that over the next several years, Asbury will continue to acquire dealerships, occasionally buy back stock and invest to improve its digital shopping experience. We wrote about Asbury in detail in our August 2021 Investor Letter.”
5. CarMax, Inc. (NYSE:KMX)
Number of Hedge Fund Holders: 28
CarMax, Inc. (NYSE:KMX) is a Virginia-based retailer of used vehicles in the United States. It offers customers a range of used vehicles, including domestic, imported, and luxury vehicles, as well as hybrid and electric vehicles. On September 30, Oppenheimer analyst Brian Nagel maintained an Outperform rating on CarMax, Inc. (NYSE:KMX) but lowered the price target on the shares to $100 from $125. The “unique” post-pandemic dynamic within the used car sector has weighed on CarMax, Inc. (NYSE:KMX)’s sales trends, the analyst told investors. However, he believes present disruptions are likely transitory and should lead to rebounding sales and more consistent, resilient market share gains.
According to Insider Monkey’s data, 28 hedge funds were long CarMax, Inc. (NYSE:KMX) at the end of Q2 2022, compared to 27 funds in the earlier quarter. Charles Akre’s Akre Capital Management is the leading position holder in the company, with 7.3 million shares worth $665 million.
Here is what Giverny Capital specifically said about CarMax, Inc. (NYSE:KMX) in its Q3 2022 investor letter:
“Other holdings enduring difficult years include CarMax, Inc. (NYSE:KMX), the largest used car retailer in the country. Demand for used cars can be cyclical, and right now sales are off as cars become less affordable. The current soft patch comes as Carmax has ramped up investment in its ability to sell more cars online. So, we have a double whammy of lower sales and higher investment in future growth. Earnings may fall in half this year, which succinctly explains the stock falling in half. I am positive, however, that Carmax continues to have, by far, the best business model for selling used cars. The success of its Instant Offer program means it has an efficient system to acquire inventory from consumers. It has the lowest costs for refurbishing those cars for resale and the lowest freight costs for moving cars to the markets where they’ll sell most profitably. It has the lowest costs in percentage-of-revenue terms of national advertising, because of its scale. The TV ads build the brand. It turns inventory faster than peers, and because used cars lose value at a rate of about $10 per day, a 15-day advantage in inventory turn amounts to $150 per car of higher profit.
Add it all up, and this is a highly advantaged company. I see no compromise to its long-term competitive position. Indeed, Carmax is gaining share in a weak market. I continue to believe Carmax could earn $10 per share in a few years, while still only commanding a mid-single digit percentage of all used car sales. The stock has been as low as $60 recently.”
4. Cazoo Group Ltd (NYSE:CZOO)
Number of Hedge Fund Holders: 29
Cazoo Group Ltd (NYSE:CZOO) is a London-based online used car retailer in the United Kingdom and rest of Europe. On August 2, Cazoo Group Ltd (NYSE:CZOO) stock shot over 180% after posting record revenues for the second quarter. Cazoo Group Ltd (NYSE:CZOO) reported a 144.9% increase in revenue from the earlier year to £333 million, supported by a 124% boost in vehicles sold. Gross profit per unit lifted to £309 from £185 in the previous quarter. Cazoo Group Ltd (NYSE:CZOO) is one of the best used car stocks to invest in.
On August 10, Berenberg analyst Saim Saeed double upgraded Cazoo Group Ltd (NYSE:CZOO) to Buy from Sell with a price target of $2.33, up from $0.49. When reporting first half results, the management demonstrated a “significant pivot in strategy” by posting an overview of its European operations, which will likely lead to a full exit, the analyst told investors. Such a move would eliminate Cazoo Group Ltd (NYSE:CZOO)’s financing gap, allow it to better support the U.K. business, and ultimately return a higher value to shareholders, said the analyst. He believes the shares “do not reflect the value of this move” and said this “key positive catalyst” is playing out sooner than forecasted.
According to Insider Monkey’s Q2 data, 29 hedge funds were bullish on Cazoo Group Ltd (NYSE:CZOO), compared to 34 funds in the prior quarter. Daniel Sundheim’s D1 Capital Partners is the biggest stakeholder of the company, with 36.8 million shares worth $26.5 million.
3. IAA, Inc. (NYSE:IAA)
Number of Hedge Fund Holders: 36
IAA, Inc. (NYSE:IAA) is an Illinois-based company that operates a digital marketplace connecting vehicle buyers and sellers. The company’s platform markets and sells total loss, damaged, and low-value vehicles for a range of sellers, including insurance companies, dealerships, fleet lease and rental car companies, and charitable organizations. IAA, Inc. (NYSE:IAA) is one of the elite used car stocks to consider.
On August 10, Baird analyst Craig Kennison maintained an Outperform rating on IAA, Inc. (NYSE:IAA) but lowered the price target on the shares to $46 from $50. The analyst noted that the company posted mixed results and narrowed guidance. Although volume remained weak due to share losses, a strong RPU provided an offset. The analyst forecasts volume to rebound as share patterns stabilize and used car prices normalize.
Among the hedge funds tracked by Insider Monkey, 36 funds reported owning stakes worth $612.8 million in IAA, Inc. (NYSE:IAA) at the end of the second quarter of 2022, compared to 34 funds in the prior quarter worth $664 million. Paul Marshall and Ian Wace’s Marshall Wace LLP is the leading stakeholder of the company, with 2.70 million shares valued at $88.5 million.
2. Lithia Motors, Inc. (NYSE:LAD)
Number of Hedge Fund Holders: 40
Lithia Motors, Inc. (NYSE:LAD) is an American automotive retailer that offers new and used vehicles, vehicle financing services, warranties, insurance contracts, vehicle and theft protection services, and automotive repair and maintenance services. On October 19, Lithia Motors (NYSE:LAD) declared a quarterly dividend of $0.42 per share, in line with previous. The dividend is payable on November 18, to shareholders of record on November 11. Lithia Motors, Inc. (NYSE:LAD) is one of the best used car stocks to invest in.
On October 21, Benchmark analyst Michael Ward reiterated a Buy recommendation on Lithia Motors (NYSE:LAD) but lowered the price target on the stock to $300 from $400 after trimming his earnings assumptions. While he believes variable gross margin for the auto dealer group will move lower from present performance, the analyst forecasts profitability to “settle at higher levels than in the past.”
According to Insider Monkey’s data, 40 hedge funds were bullish on Lithia Motors (NYSE:LAD) at the end of June 2022, compared to 46 funds in the preceding quarter. David Abrams’ Abrams Capital Management is the biggest position holder in the company, with 2.35 million shares worth $646 million.
Here is what Oakmark Select Fund has to say about Lithia Motors, Inc. (NYSE:LAD) in its Q1 2022 investor letter:
“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)
Number of Hedge Fund Holders: 50
Copart, Inc. (NASDAQ:CPRT) is a Texas-based company that offers online auctions and vehicle remarketing services. The company sells its products to licensed vehicle dismantlers, rebuilders, repair licensees, used vehicle dealers, and exporters. Copart, Inc. (NASDAQ:CPRT) is one of the top used car stocks to buy.
On September 9, Baird analyst Craig Kennison assigned an Outperform rating to Copart, Inc. (NASDAQ:CPRT) but lowered the price target on the shares to $135 from $150. The analyst said with used car prices declining, he expects the total loss rate to bottom soon, eventually supporting more assignments at the expense of unit profitability.
According to Insider Monkey’s Q2 data, 50 hedge funds were bullish on Copart, Inc. (NASDAQ:CPRT), compared to 44 funds in the last quarter. Jim Simons’ Renaissance Technologies held the largest stake in the company, comprising 1.08 million shares worth $117.5 million.
Here is what Wedgewood Partners specifically said about Copart, Inc. (NASDAQ:CPRT) in its Q3 2022 investor letter:
“Copart, Inc. (NASDAQ:CPRT) reported +8% growth in operating income driven by a +5% increase in volume of totaled vehicles processed and an +8% increase in the value of those units. Although overhead expenses outstripped revenues in the face of persistent wage inflation, Copart can contain these costs over a multi-year time horizon. The Company maintains an effective duopoly in U.S. salvage vehicle auctions (along with IAA Inc.) and has been able to flex is salvage business to conform to the changes filtering through from the unprecedented supply (and demand) challenges of the new and used vehicle market. This is due to Copart’s unique, two-sided network platform that consists of the largest North American P&C insurance carriers and automobile dealerships, which are getting increasing access to foreign salvage buyers. As automobiles are becoming more sophisticated with hard-to-repair electronics and computers on-board, we think Copart is helping insurance partners find a life “after salvage” with consumers, particularly outside the U.S., that place a higher value on these vehicles, often simply due to different regulatory regimes. Copart can grow at attractive double-digit rates as this phenomenon continues for the foreseeable future.”
You can also take a look at 10 Biggest Car Companies In the World By Sales and 12 Best Emerging Stocks To Buy Now.
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Disclosure: None. 10 Best Used Car Stocks To Buy Now is originally published on Insider Monkey.
