In this article, we discuss 11 most undervalued auto stocks according to hedge funds.

The automotive industry has been plagued by multiple problems apart from the COVID-19 pandemic, such as the constrained Asia Pacific backdrop and the war in Ukraine. The shortages in microchips and labor are also impacting every level of the automotive supply chain. However, the development of electric vehicles is a significant global trend, with particular focus on improving battery performance and expanding charging infrastructure. This results in increased research and development by vehicle manufacturers, who are continuing to invest in EV technology despite other challenges they may be facing. 

The fast pace of development in the EV industry indicates that manufacturers have an optimistic outlook about the future of EVs. New advancements are regularly being made, bringing the industry closer to the concept of “Vehicles 2.0”. Larry Keyler, Partner and Global Automotive Leader at RSM US, said on January 18: 

“The development of autonomous vehicle technology has slowed down somewhat, as manufacturers redirect and refocus on the refinement of the electric vehicle. These are certainly being driven by the regulatory landscape, which at the moment is accelerating a path to wide-scale EV adoption. Governments in North America, Europe, and Asia Pacific are all implementing their own initiatives, not to mention the UN, and auto makers are under pressure to deliver”. 

However, Bernstein analyst Daniel Roeska wrote in an investor note in December 2022: 

“There is active demand destruction in the industry, given inflation, interest rates, and energy costs − but so far, this has mostly impacted the backlog.”

Investors looking to explore the auto space can also check out 11 Best Autonomous Vehicle Stocks To Buy, 10 Fastest Growing Car Companies in the World, and 10 Best Auto Stocks To Buy. Undervalued stocks are those that trade below what they are worth, and these stocks tend to outperform during bear markets and economic recessions. Some of the most undervalued auto stocks according to hedge funds include General Motors Company (NYSE:GM), Ford Motor Company (NYSE:F), and AutoNation, Inc. (NYSE:AN). 

Our Methodology 

We scanned Insider Monkey’s database of holdings of 920 elite hedge funds tracked as of the end of the third quarter of 2022 and picked the 11 most undervalued auto stocks that have P/E ratios of less than 10 as of January 19. The list is arranged in ascending order of the number of hedge fund holders in each firm. 

Most Undervalued Auto Stocks According To Hedge Funds

11. Sonic Automotive, Inc. (NYSE:SAH)

Number of Hedge Fund Holders: 21

P/E Ratio as of January 19: 5.23

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, selling new and used cars, light trucks, and replacement parts. The company also provides vehicle maintenance, manufacturer warranty repair, paint and collision repair services, arrangement of extended warranties, service contracts, financing, insurance, and other aftermarket products. With a P/E ratio of 5.23 as of January 19, Sonic Automotive, Inc. (NYSE:SAH) is one of the most undervalued stocks to buy according to hedge funds. 

On October 31, Benchmark analyst Michael Ward maintained a Buy rating on Sonic Automotive, Inc. (NYSE:SAH) but lowered the price target on the shares from $71 to $62. He reduced his earnings assumptions to reflect lower industry volume assumptions, noting that dealers are likely to carry 30% less inventory going forward. The analyst believes that the financial performance at Sonic Automotive, Inc. (NYSE:SAH) will remain above historical levels and that the model will change for the better.

According to Insider Monkey’s data, 21 hedge funds were long Sonic Automotive, Inc. (NYSE:SAH) at the end of September 2022, compared to 20 funds in the last quarter. Dmitry Balyasny’s Balyasny Asset Management held the biggest stake in the company, with 633,755 shares worth $27.4 million. 

Like General Motors Company (NYSE:GM), Ford Motor Company (NYSE:F), and AutoNation, Inc. (NYSE:AN), Sonic Automotive, Inc. (NYSE:SAH) is one of the most popular auto stocks among smart investors. 

10. Penske Automotive Group, Inc. (NYSE:PAG)

Number of Hedge Fund Holders: 24

P/E Ratio as of January 19: 6.19

Penske Automotive Group, Inc. (NYSE:PAG) is a Michigan-based diversified transportation services company that operates automotive and commercial truck dealerships. The company operates through four segments – Retail Automotive, Retail Commercial Truck, Other, and Non-Automotive Investments. It is one of the most undervalued auto stocks to invest in. The company repurchased 6.4 million units of common stock for $675.1 million year-to-date through October 25, 2022. 

On October 6, JPMorgan analyst Rajat Gupta lowered the price target for Penske Automotive Group, Inc. (NYSE:PAG) from $125 to $110 and kept a Neutral rating on the shares. Citing ongoing macro challenges, the analyst also dialed back estimates for 2023 “materially” to reflect a mild recession and hitting a new normal by 2025.

According to Insider Monkey’s third quarter database, Penske Automotive Group, Inc. (NYSE:PAG) was part of 24 hedge fund portfolios, compared to 22 in the last quarter. Cliff Asness’ AQR Capital Management is the leading stakeholder of the company, with 485,534 shares worth $47.8 million. 

9. Stellantis N.V. (NYSE:STLA)

Number of Hedge Fund Holders: 25

P/E Ratio as of January 19: 2.88

Stellantis N.V. (NYSE:STLA) is a Netherlands-based company that engages in the design, engineering, manufacturing, distribution, and commercialization of automobiles and light commercial vehicles, engines, transmission systems, metallurgical products, and production systems worldwide. On January 9, Stellantis N.V. (NYSE:STLA) announced that it signed an agreement with Element 25 to secure significant supplies of raw materials for battery electric vehicle production. Under the five-year agreement, Element 25 will provide battery grade, high purity manganese sulfate monohydrate to Stellantis N.V. (NYSE:STLA) for use in electric vehicle battery packs.

On October 14, Berenberg analyst Adrian Yanoshik maintained a Buy recommendation on Stellantis N.V. (NYSE:STLA) but lowered the firm’s price target on the shares to EUR 19 from EUR 21. 

Peter Rathjens, Bruce Clarke, and John Campbell’s Arrowstreet Capital held the largest stake in Stellantis N.V. (NYSE:STLA) at the end of the third quarter of 2022, comprising 29 million shares worth $349.35 million. 

8. Allison Transmission Holdings, Inc. (NYSE:ALSN)

Number of Hedge Fund Holders: 26

P/E Ratio as of January 19: 8.07

Allison Transmission Holdings, Inc. (NYSE:ALSN) is an Indiana-based company that designs, manufactures, and sells commercial and defense fully-automatic transmissions for medium and heavy-duty commercial vehicles, as well as medium and heavy-tactical U.S. defense vehicles worldwide. It is one of the most undervalued stocks to invest in according to smart investors. 

On January 12, Allison Transmission Holdings, Inc. (NYSE:ALSN) announced that it has partnered with Nikola Corp (NASDAQ:NKLA) to carry out testing of its Class 8 battery-electric vehicle and hydrogen fuel cell electric vehicle at Allison Transmission Holdings, Inc. (NYSE:ALSN)’s state-of-the-art Vehicle Electrification + Environmental Test (VE+ET) Center. At the facility, Allison imitates real world applications and climate conditions, allowing original equipment manufacturers to lower product development and validation timelines, in order to bring innovative technology and vehicle systems to market quicker and more effectively.

According to Insider Monkey’s data, 26 hedge funds were bullish on Allison Transmission Holdings, Inc. (NYSE:ALSN) at the end of September 2022, compared to 25 funds in the prior quarter. Harris Associates is the largest position holder in the company, with more than 5 million shares worth $172.70 million. 

Here is what Oakmark Funds has to say about Allison Transmission Holdings, Inc. (NYSE:ALSN) in its Q2 2021 investor letter:

“Allison Transmission is a niche industrial company with roughly 80% market share in truck transmissions. Its products provide the company’s customers with critical advantages, including fuel economy, reduced emissions, reliability and total-cost-of ownership. The importance of Allison Transmission’s products and its dominant market position have historically given it strong pricing power. Yet, in the year leading up to our purchase, the company’s shares underperformed peers by more than 40 percentage points. Although we believe the company’s fundamentals are still as strong, if not better, than its peers, investors have worried about how commercial vehicle electrification will affect Allison Transmission’s long-term business. We believe that the company’s investments in next-generation products will enable it to maintain its position as an industry leader, even as technologies change. Furthermore, we believe that our investment carries limited downside risk because Allison Transmission’s shares sell at 10x free cash flow, which ascribes almost no value to the future. In addition, the company’s management team diligently returns capital to shareholders.”

7. Group 1 Automotive, Inc. (NYSE:GPI)

Number of Hedge Fund Holders: 30

P/E Ratio as of January 19: 5.55

Group 1 Automotive, Inc. (NYSE:GPI) is a Texas-based company that operates in the automotive retail industry, specializing in the sale of new and used cars, light trucks, vehicle parts, service and insurance contracts, vehicle financing, and automotive maintenance and repair services. On November 16, Group 1 Automotive, Inc. (NYSE:GPI)’s board of directors increased the common stock repurchase authorization by $161 million to $200 million. The company also distributed a $0.39 per share quarterly dividend on December 15, representing a 2.6% increase from its prior dividend of $0.38.

On October 6, JPMorgan analyst Rajat Gupta upgraded Group 1 Automotive, Inc. (NYSE:GPI) to Overweight from Neutral with a $210 price target. The analyst noted that the setup for franchise auto dealers into Q3 earnings is the most negative he has encountered since the pandemic. He upgraded Group 1 Automotive, Inc. (NYSE:GPI) based on his revised price targets for the group.

According to Insider Monkey’s Q3 data, Group 1 Automotive, Inc. (NYSE:GPI) was part of 30 hedge fund portfolios, compared to 24 in the earlier quarter. Anthony Bozza’s Lakewood Capital Management is the largest position holder in the company, with 331,726 shares worth $47.4 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.”

6. The Goodyear Tire & Rubber Company (NASDAQ:GT)

Number of Hedge Fund Holders: 32

P/E Ratio as of January 19: 3.58

The Goodyear Tire & Rubber Company (NASDAQ:GT) was incorporated in 1898 and is headquartered in Akron, Ohio. The company manufactures, distributes, and sells tires for automobiles, trucks, buses, aircraft, motorcycles, earthmoving equipment, and mining and industrial equipment under the Goodyear, Cooper, Dunlop, Kelly, Debica, Sava, Fulda, Mastercraft, and Roadmaster brands. 

On November 29, Argus analyst David Coleman downgraded The Goodyear Tire & Rubber Company (NASDAQ:GT) to Hold from Buy. The analyst warned that the company is facing pressure from accelerating costs, unfavorable currency translation, and softness in the EMEA region, also trimming his 2022 EPS view to $1.40 from $2.08 and his 2023 view to $1.63 from $2.63. 

According to Insider Monkey’s data, Ken Griffin’s Citadel Investment Group is the biggest stakeholder of The Goodyear Tire & Rubber Company (NASDAQ:GT) as of the end of the third quarter of 2022, with 3.24 million shares worth $32.7 million. 

In addition to General Motors Company (NYSE:GM), Ford Motor Company (NYSE:F), and AutoNation, Inc. (NYSE:AN), The Goodyear Tire & Rubber Company (NASDAQ:GT) is one of the most undervalued auto stocks according to hedge funds. 

Here is what ClearBridge Small Cap Value Strategy has to say about The Goodyear Tire & Rubber Company (NASDAQ:GT) in its Q3 2022 investor letter:

“We exited a number of stocks during the period, including Goodyear Tire & Rubber (NASDAQ:GT). We sold our position in Goodyear due to the cavalcade of concerns including the company’s elevated debt levels, inflationary pressures from higher input prices, continued manufacturing challenges in the auto industry and complications with the company’s manufacturing volume. With substantial exposure to the automotive industry through other portfolio holdings, we elected to consolidate our exposure within those higher-conviction holdings.”

5. AutoNation, Inc. (NYSE:AN)

Number of Hedge Fund Holders: 33

P/E Ratio as of January 19: 4.52

AutoNation, Inc. (NYSE:AN) is a Florida-based automotive retailer that operates through three segments – Domestic, Import, and Premium Luxury. On December 12, AutoNation, Inc. (NYSE:AN) announced its acquisition of RepairSmith, a mobile automotive repair and maintenance company. The acquisition will allow AutoNation to become an all-inclusive transportation solutions company rather than simply an auto dealer. It is one of the most undervalued auto stocks according to elite investors. 

On January 17, Morgan Stanley analyst Adam Jonas downgraded AutoNation, Inc. (NYSE:AN) to Underweight from Equal Weight and trimmed the price target to $96 from $104. The analyst lowered franchise dealer forecasts and downgraded AutoNation, Inc. (NYSE:AN) after “bellwether” CarMax, Inc. (NYSE:KMX)’s disappointing results. Declining used car prices and growing interest rates may take affordability to a “tipping point,” increasing downside to selling prices and units, the analyst told investors in a research note. He is looking for better entry points in the auto space.

According to Insider Monkey’s Q3 data, 33 hedge funds were long AutoNation, Inc. (NYSE:AN), compared to 31 funds in the last quarter. Cliff Asness’ AQR Capital Management is the leading position holder in the company, with 1.03 million shares worth $105.5 million. 

Here is what Black Bear Value Partners has to say about 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. Asbury Automotive Group, Inc. (NYSE:ABG)

Number of Hedge Fund Holders: 34

P/E Ratio as of January 19: 5.25

Asbury Automotive Group, Inc. (NYSE:ABG) is a Georgia-based automotive retailer that deals in new and used vehicles, vehicle repair and maintenance services, replacement parts, and collision repair services. Asbury Automotive Group, Inc. (NYSE:ABG) is one of the most undervalued stocks in the auto sector according to hedge funds. 

On October 6, JPMorgan analyst Rajat Gupta maintained a Neutral rating on Asbury Automotive Group, Inc. (NYSE:ABG) and lowered the firm’s price target on the shares to $185 from $205. The analyst noted the setup for franchise auto dealers into Q3 earnings is the most negative he has encountered since the pandemic, and he cut back estimates for 2023 “materially” to reflect a mild recession and expects a new normal by 2025.

According to Insider Monkey’s data, 34 hedge funds were long Asbury Automotive Group, Inc. (NYSE:ABG) at the end of Q3 2022, compared to 27 funds in the prior quarter. Lauren Taylor Wolfe’s Impactive Capital is the largest stakeholder of the company, with 2.20 million shares worth $332.85 million. 

Bonhoeffer Capital Management made the following comment about Asbury Automotive Group, Inc. (NYSE:ABG) in its Q3 2022 investor letter:

“One of our holdings in the distribution theme is Asbury Automotive Group, Inc. (NYSE:ABG), an automobile dealership firm. Asbury’s growth model is through same-store sales growth (4% per year), internet distribution (10% per year), and synergistic M&A (5% per year). These are enhanced by opportunistic operational leverage from scale and share repurchases (5% annual growth). Over the past 10 years, Asbury’s net income margins are up 120% with a 5x increase in revenues. These factors should lead to about a 20% EPS growth going forward. Ashtead has had 19% and 31% EPS growth over the past five and 10 years, respectively.

As can be seen below, a large portion of future growth is based upon the growth of internet sales. Both Asbury and Lithia have internet strategies which capture a younger demographic who do not visit dealerships with the same frequency as older folks. Asbury, through its online platform Clicklane, has found internet purchasers have very little overlap with existing customers; 95% are new customers. Asbury’s strategy is to target customers who are within 20 miles of an existing Asbury location vs. online-only competitors (like Carvana) and Lithia. Asbury has had a per-store growth rate of 67% over the last year and only sells cars online in about 60% of its current footprint. This growth rate will decline going forward as the markets mature, but it will be bolstered as Clicklane is rolled out to the remaining 40% of Asbury’s footprint…” (Click here to read the full text)

3. Lithia Motors, Inc. (NYSE:LAD)

Number of Hedge Fund Holders: 45

P/E Ratio as of January 19: 5.06

Lithia Motors, Inc. (NYSE:LAD) was founded in 1946 and is headquartered in Medford, Oregon. It is an automotive retailer in the United States that operates through three segments – Domestic, Import, and Luxury. On December 6, Lithia Motors, Inc. (NYSE:LAD) announced that it has expanded into Colorado with purchase of its first Ferrari store. The acquisition is expected to generate $75 million in annualized revenue, bringing Lithia Motors, Inc. (NYSE:LAD)’s total expected annualized revenue in 2022 to more than $3.3 billion. Acquisitions are a primary part of the company’s 2025 Plan to achieve $50 billion in revenue and $55 to $60 in earnings per share.

On January 13, Wells Fargo analyst Colin Langan downgraded Lithia Motors, Inc. (NYSE:LAD) to Equal Weight from Overweight with a price target of $233, up from $212. The analyst expects gross margins to begin to fall back to their long-term averages from current record highs, and is highly concerned that gross margins will also normalize in both used and F&I segments, which also are at peak highs. 

According to Insider Monkey’s data, 45 hedge funds were bullish on Lithia Motors, Inc. (NYSE:LAD) at the end of Q3 2022, compared to 40 funds in the earlier quarter. David Abrams’ Abrams Capital Management is the largest stakeholder of the company, with 2.35 million shares worth $504.4 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.”

2. Ford Motor Company (NYSE:F)

Number of Hedge Fund Holders: 47

P/E Ratio as of January 19: 5.40

Ford Motor Company (NYSE:F) is a Michigan-based company that designs, manufactures, and services Ford trucks, cars, sport utility vehicles, electrified vehicles, and Lincoln luxury vehicles worldwide. It operates through three segments – Automotive, Mobility, and Ford Credit. Ford Motor Company (NYSE:F) is one of the most undervalued stocks to invest in. On January 5, the company reported gains in EV market share and strong truck sales. According to a company data release, Ford sold 179,279 vehicles in December 2022, up from 173,740 in December 2021.

On November 30, Citi analyst Itay Michaeli raised the price target on Ford Motor Company (NYSE:F) to $14 from $13 and maintained a Neutral rating on the shares. The analyst updated his model to reflect the Q3 results and recent data points. The new target represents slightly higher multiples reflecting Ford Motor Company (NYSE:F)’s improved auto free cash flow conversion this year, the analyst wrote in a research note. However, the analyst would like to see a more attractive entry point in the shares.

According to Insider Monkey’s data, 47 hedge funds were long Ford Motor Company (NYSE:F) at the end of September 2022, compared to 46 funds in the prior quarter. Ken Fisher’s Fisher Asset Management is the largest stakeholder of the company, with nearly 45 million shares worth $503.6 million. 

Here is what Baron Fund has to say about Ford Motor Company (NYSE:F) in its Q1 2022 investor letter:

“Ford (NYSE:F) is another example of typical industrial manufacturing business executive mindsets. The April 18, 2022, Bloomberg Businessweek cover story features Ford CEO Jim Farley behind the wheel of an electrified Ford F-150 Lightning. The article is titled, “Hey Elon, THIS is a truck.” I thought the article was terrific. One idea especially stood out to me. Since the F-150 is such a popular vehicle, it “argued for a gradual approach to electrification. Essentially the company retrofitted an existing F-150 with an electric powertrain rather than develop an entirely new truck.” No all-in financial and operation bet by this company on electrification.”

1. General Motors Company (NYSE:GM)

Number of Hedge Fund Holders: 74

P/E Ratio as of January 19: 6.01

General Motors Company (NYSE:GM) is a Michigan-based company that designs, manufactures, and sells trucks, crossovers, cars, automobile parts, and accessories in North America, the Asia Pacific, the Middle East, Africa, South America, the United States, and China. General Motors Company (NYSE:GM) is one of the most undervalued auto stocks according to smart investors. The company announced that it delivered 2.2 million vehicles in the United States in 2022, surpassing Toyota Motor Corporation. Heading into 2023, the automaker expects EV sales to rise meaningfully and promote continued growth.

On January 19, Deutsche Bank analyst Emmanuel Rosner maintained a Hold rating on General Motors Company (NYSE:GM) but lowered the firm’s price target on the shares to $33 from $35. The analyst expects a mixed Q4 earnings and 2023 guidance season for U.S. autos, with multiple companies potentially falling short of quarterly consensus estimates, and most of them likely to issue cautious 2023 guidance amid volatile industry conditions and macro uncertainty.

According to Insider Monkey’s data, 74 hedge funds were long General Motors Company (NYSE:GM) at the end of the third quarter of 2022, compared to 75 funds in the prior quarter. Warren Buffett’s Berkshire Hathaway is the largest position holder in the company, with 50 million shares worth $1.60 billion. 

Here is what Diamond Hill Capital had to say about General Motors Company (NYSE:GM) in its Q3 2022 investor letter:

“Most recently, we initiated a position in General Motors Company (NYSE:GM), one of the largest automakers in the United States. Over the past several years, GM has taken steps necessary to focus the company on the most profitable segments and move into position to compete in an electrified and autonomous world. With the recent rise in interest rates there was a meaningful selloff in the auto industry, which presented us with an attractive entry point to a name we know well.”

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Disclosure: None. 11 Most Undervalued Auto Stocks According To Hedge Funds is originally published on Insider Monkey.