10 Best Used Car Stocks To Invest In

Published on May 16, 2022 at 8:56 am by Sheryar Siddiq in Hedge Funds, News

In this article, we discuss the 10 best used car stocks to buy in 2022.

Whenever the automotive sector enters the spotlight, the conversations almost always revolve around the electric revolution in the industry and the transition towards newer, environment-friendlier vehicles produced by major companies. In such scenarios, the used car market barely gets any media coverage. This leaves many experts confused since the used car market has consistently been more valuable than the new car market, with a much higher number of vehicles sold. Despite a growth spurt in the new car market, it may take a few years for it to have an effect on the used car market since people are still recovering from the recession and a significantly lower number of used cars are entering the market compared to previous years. According to Statista, the used car market is projected to reach over $1.5 trillion in 2027, up from $1.2 trillion in 2020, representing a compound annual growth rate of approximately 3.2% across seven years.

In another report, 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. Although supply chain disruption and transportation halt caused by the pandemic reduced used car purchases, the market had begun reverting to the pre-pandemic situation during the later stages of 2020 and 2021, leading to an increase in opportunities for the used car market worldwide. Numerous factors have contributed to the growth of the market these past few years, including the rise of online sales channels, an increasing demand for luxury cars, rise in income levels, shorter periods of car ownership, and a growing preference for two-wheeler owners to upgrade to small and compact cars.

However, it should be noted that the absurd growth of used vehicles market – which in turn accelerated the prices of new cars as well – creates massive risks. A number of experts and analysts warn that once global supply chains sort themselves out and the economic machinery starts running properly once again, used car prices could witness a significant drop, perhaps by 20% to 30%. In this environment, those who are looking to invest in used car stocks should understand the trends that have played a major role in the growth of the sector and still continue to shape the future. Some of the major players that investors should take note of in the used car industry include CarMax, Inc. (NYSE:KMX), AutoNation, Inc. (NYSE:AN), and Carvana Co. (NYSE:CVNA), among others listed below.

Photo by Nima Sarram on Unsplash

Our Methodology

For this list, we focused on stocks with solid business fundamentals and growth incentives. We also took into account company financials, most recent quarterly results, and the analyst and sentiment around these stocks.

The hedge fund sentiment around each stock was derived from Insider Monkey’s database which tracks 924 hedge funds as of the fourth quarter of 2021.

Best Used Car Stocks To Invest In

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

Number Of Hedge Fund Holders: 18

Penske Automotive Group, Inc. (NYSE:PAG), headquartered in Bloomfield Hills, Michigan, is a diversified international transportation services company and one of the world’s premier automotive and commercial truck retailers.

Recently, Penske Automotive Group, Inc. (NYSE:PAG) announced that it had acquired Terry Lee Hyundai and Genesis of Noblesville, Indiana, increasing the company’s presence in the Indianapolis metropolitan market. The acquisition is expected to generate an annualized revenue of $80 million. The addition of the Hyundai and Genesis dealerships brings the total expected acquired annualized revenue in 2022 to approximately $745 million.

The company recently delivered upbeat profit and sales for the first quarter of 2022. According to its earnings report, the automotive company earned $4.76 per share on an adjusted basis, surpassing analysts’ estimates by $1.12. Additionally, Penske Automotive Group, Inc. (NYSE:PAG) posted revenues of $6.98 billion, up 20.81% on a year-over-year basis, crossing expectations of $652.25 million.

According to Insider Monkey’s database, 18 hedge funds reported holding stakes in Penske Automotive Group, Inc. (NYSE:PAG) at the end of December 2021, with stakes worth $230.6 million. This is compared to 17 funds in the previous quarter that held stakes worth $241.9 million. Cliff Asness’ AQR Capital Management is the biggest stakeholder in the company, with 555,984 shares valued at approximately $58.89 million.

Similar to CarMax, Inc. (NYSE:KMX), AutoNation, Inc. (NYSE:AN), and Carvana Co. (NYSE:CVNA), Penske Automotive Group, Inc. (NYSE:PAG) is one of the best used car stocks to invest in.

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

Number Of Hedge Fund Holders: 19

Group 1 Automotive, Inc. (NYSE:GPI) is a Texas-based automotive retailer that offers new and used vehicles, while also providing financing, service contracts, automotive maintenance and repair services, and vehicle components. The company owns and operates 201 automotive dealerships, 267 franchises, and 46 collision centers across the United States and the United Kingdom.

Earlier this March, Group 1 Automotive, Inc. (NYSE:GPI) announced the acquisition of Charles Maund Toyota in Austin, Texas. This dealership is expected to generate $435 million in annual revenues and represents the 16^th Toyota store in the Company’s U.S. portfolio.

On April 27, Group 1 Automotive, Inc. (NYSE:GPI) produced its earnings report which detailed the company’s earnings for the fiscal first quarter of 2022. The company reportedly generated revenues of $3.84 billion for the quarter, up 27.72% on a year-over-year basis, and surpassed revenue estimates by $69.45 million. The company reported earnings per share of $10.92, crossing EPS estimates by $1.49.

According to Insider Monkey’s database, Group 1 Automotive, Inc. (NYSE:GPI) was spotted on 19 investment portfolios by the end of the fourth quarter of 2021. The total stakes of these funds in the company amounted to approximately $278.16 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.”

8. KAR Auction Services, Inc. (NYSE:KAR)

Number Of Hedge Fund Holders: 21

KAR Auction Services, Inc. (NYSE:KAR), along with its subsidiaries, provides used vehicle auctions and related vehicle remarketing services for the automotive industry. Headquartered in Carmel, Indiana, the company sold nearly 2.6 million vehicles valued at over $40 billion through auctions and generated a revenue of approximately $2.3 billion in 2021.

On May 10, KAR Auction Services, Inc. (NYSE:KAR) successfully completed its sale of the ADESA U.S. physical auction business to Carvana Co. (NYSE:CVNA). Originally announced in February, includes all ADESA U.S. physical auction sites and operations. The completed transaction advances the company’s digital D2D strategy, enhances its financial profile, and better positions the company and its industry-leading digital marketplaces for accelerated growth.

CJS Securities analyst Robert Labick upgraded KAR Auction Services, Inc. (NYSE:KAR) to Outperform from Market Perform with a $20 price target on May 3.

Out of the 924 elite hedge funds tracked by Insider Monkey in the fourth quarter of 2021, 21 were long KAR Auction Services, Inc. (NYSE:KAR) with stakes worth $339.3 million. David Paradice’s Paradice Investment Management is one of the leading stakeholders in KAR Auction Services, Inc. (NYSE:KAR), with over 6.07 million stakes worth approximately $94.8 million.

Here is what White Brook Capital has to say about KAR Auction Services, Inc. (NYSE:KAR) in its Q1 2022 investor letter:

“During the quarter, White Brook Capital Partners exited the recently entered position in KAR Auction Services, Inc (KAR). During the quarter, the Company sold its US physical wholesale auto auction business to Carvana creating an attractive exit opportunity. Previously KAR had enviable market share of the physical auction market and was quickly growing its online auction business where it was the second largest player in a fragmented market. Their advantage online is uncommanding in my view and they needed their dominant physical presence to create differentiation and grow awareness and use of the online business. I was pleased with the stock price presented after the news of the physical auction’s sale and simultaneously less certain about the standalone online offering’s competitive dynamism and ability to execute. The price offered for our shares represented a very good return on our investment, even more so given the short time the capital was invested, and we exited.”

7. CarGurus, Inc. (NASDAQ:CARG)

Number Of Hedge Fund Holders: 24

CarGurus, Inc. (NASDAQ:CARG) is a Cambridge, Massachusetts-based automotive research and shopping website that assists users in comparing local listings for used and new cars, and contacting sellers.

On May 10, Needham analyst Chris Pierce lowered his price target on CarGurus, Inc. (NASDAQ:CARG) to $40 from $52 but maintained a Buy rating on the shares of the company. According to the analyst, the company reported better than expected Q1 results, but its Q2 guidance suggests higher planned spending. However, he adds that he still views CarGurus, Inc. (NASDAQ:CARG) as a compelling investment opportunity given its subscription model, positive adjusted EBITDA profile, and an “untaxing multiple” at current prices.

The company posted an EPS of $0.36 by the end of the first quarter of 2022, which beat analysts’ estimates by $0.01. Revenue for the quarter was recorded at $430.61 million, a staggering increase of 151.28% compared to the year-ago quarter, surpassing market estimates by $37.95 million.

In Q4 2021, 24 hedge funds were bullish on CarGurus, Inc. (NASDAQ:CARG), with collective stakes amounting to roughly $292.5 million. PAR Capital Management held 1.99 million stakes in CarGurus, Inc. (NASDAQ:CARG) at the end of the fourth quarter. These stakes are valued at $66.9 million, making it the leading stakeholder of the company.

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

Number Of Hedge Fund Holders: 26

Incorporated in 1997, Sonic Automotive, Inc. (NYSE:SAH) is one of the largest automotive retailers in the United States. The company operates over 100 dealerships spread across 14 states and 25 major metropolitan markets. The company’s EchoPark unit is the major growth engine of the firm. The auto retailer saw record used-vehicle unit sales of 77,835 for 2021, up 36.2% year-over-year.

On April 28, Sonic Automotive, Inc. (NYSE:SAH) reported financial results for the first quarter of 2022, with an all-time record quarterly revenue of $3.6 billion, up 28.7% on a year-over-year basis. Additionally, the company approved a quarterly cash dividend of $0.25 per share, the same as the previous. This will be payable on July 15, to all stockholders of record on June 15, 2022.

Sonic Automotive, Inc. (NYSE:SAH) is a notable stock pick among elite hedge funds, and by the end of Q4 2021, 26 hedge funds held long positions in the company worth roughly $139.12 billion. Teewinot Capital Advisers is the most prominent investor in Sonic Automotive, Inc. (NYSE:SAH) with stakes worth approximately $28.45 million in the company.

In addition to CarMax, Inc. (NYSE:KMX), AutoNation, Inc. (NYSE:AN), and Carvana Co. (NYSE:CVNA), Sonic Automotive, Inc. (NYSE:SAH) is a stock investors should pay attention to.

5. Asbury Automotive Group, Inc. (NYSE:ABG)

Number Of Hedge Fund Holders: 32

One of the largest automotive retailers in the U.S., Asbury Automotive Group, Inc. (NYSE:ABG) provides new and used vehicles, as well as car repair and replacement parts, maintenance services, and collision repair services. The company’s strategic acquisitions made in 2021 have set it on pace to generate $16 billion in revenue in 2022, a 63% increase over the previous year.

For the fiscal first quarter of 2022, Asbury Automotive Group, Inc. (NYSE:ABG) announced that its quarterly revenues came in at $3.91 billion, up 78.38% on a year-over-year basis, and outperformed the market by more than $2.64 million. The company also reported an EPS of $9.27, beating expert estimates by $0.33.

Out of the 924 elite hedge funds tracked by Insider Monkey in the fourth quarter of 2021, 32 were long Asbury Automotive Group, Inc. (NYSE:ABG) with stakes worth $1.04 billion. This is an increase from 22 funds in the preceding quarter, with stakes amounting to $995.6 million. David Abrams’ Abrams Capital Management is one of the leading stakeholders in Asbury Automotive Group, Inc. (NYSE:ABG), with over 2.1 million stakes worth approximately $365.87 million.

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 carriers 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 buyback stock and invest to improve its digital shopping experience. We wrote about Asbury in detail in our August 2021 Investor Letter.”

4. CarMax, Inc. (NYSE:KMX)

Number Of Hedge Fund Holders: 35

CarMax, Inc. (NYSE:KMX) is a Virginia-based used vehicle retailer that operates two business segments: CarMax Sales Operations and CarMax Auto Finance. With 220 locations across the country, it is also one of the nation’s largest auctioneers of vehicles.

During the fiscal year 2021, CarMax, Inc. (NYSE:KMX) sold over 750,000 vehicles, maintaining one of the largest used-vehicle financing arms, with just over 1 million customer accounts amounting to $13.85 billion in receivables. Additionally, the company expects to increase this amount to 2 million by 2026, representing over 5% of the used auto market share in the United States.

Among the hedge funds tracked by Insider Monkey, 36 were bullish on CarMax, Inc. (NYSE:KMX) at the end of the fourth quarter of 2021, with aggregate positions worth $1.62 billion. Virginia-based investment firm Akre Capital Management is a leading shareholder in CarMax, Inc. (NYSE:KMX) with 7.2 million shares worth more than $949 million.

Fiduciary Management, an investment management firm, mentioned CarMax, Inc. (NYSE:KMX) in its “Large Cap Equity Fund” first quarter 2022 investor letter. Here is what the fund said:

“CarMax, headquartered in Richmond, VA, is the largest and most profitable used car retailer in the U.S., selling a combined 1.596 million used vehicles annually through retail and wholesale channels across its 226 stores and omni-channel platform. The company has just 4% of a huge $750 billion market. It operates across two segments, CarMax Sales Operation and CarMax Auto Finance (CAF), together covering all aspects of auto merchandising, service, and financing. By segment, the profit is also split into CarMax Sales Operations (80%) and CAF (20%).⁵ CarMax Sales Operation has three primary sources of revenue: Used (78% of sales and 63% of segment gross profit), Wholesale (19% of sales and 21% of segment gross profit), and Other (3% of sales and 16% of segment gross profit).

Good Business

The CarMax brand stands for providing a large selection of high-quality used vehicles at fair prices, and it has earned the trust of customers since beginning operations nearly 30 years ago.

The company has demonstrated consistent growth and leading profitability in one of the largest retail markets in the world ($750 billion). Sales and earnings per share (EPS) have grown at +8% and +11% annually over the last decade, with return on equity averaging approximately 20%…” (Click here to see the full text)

3. AutoNation, Inc. (NYSE:AN)

Number Of Hedge Fund Holders: 37

AutoNation, Inc. (NYSE:AN) is an American automotive retailer based in Fort Lauderdale, Florida, that provides new and pre-owned vehicles and associated services in the United States. The recent acquisitions of Peacock Automotive and Priority 1 Automotive are set to add $380 million and $420 million, respectively, to AutoNation, Inc. (NYSE:AN)’s annualized revenues.

As of Q4 2021, 37 hedge funds in the database of Insider Monkey held stakes worth $727.14 million in AutoNation, Inc. (NYSE:AN), compared to 29 in the previous quarter worth approximately $680.9 million. Of these, Arrowstreet Capital reported holding over 1.28 million shares worth $150.59 million in AutoNation, Inc. (NYSE:AN).

Earlier this April, Truist analyst Stephanie Moore upgraded AutoNation, Inc. (NYSE:AN) to Buy from Hold with a price target of $140, up from $130. According to the analyst, the company has set the auto retail industry standard in terms of “consistent solid execution”, and after it set its 8th consecutive record quarter, she has even greater confidence in her 2023 earnings assumptions.

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 layout a single dollar of cash. It has a dramatic impact on my estimates of free-cashflow 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.”

2. Carvana Co. (NYSE:CVNA)

Number Of Hedge Fund Holders: 56

Carvana Co. (NYSE:CVNA) is an online used car retailer based in Tempe, Arizona. The fastest growing online used car dealer in the United States, the company is known for its multi-story car vending machines. Shares of the heavily-shorted online auto retailer are continuing to rebound despite some loss of confidence among analysts, bouncing nearly 20% on the open market on May 13, before moderating some gains.

As per its earnings report, the company’s fiscal Q2 non-GAAP EPS was -$2.89, while the net revenue for the quarter came in at $3.50 billion, outpacing the consensus estimate of $125.65 million.

At the end of the fourth quarter of 2021, 56 hedge funds in the database of Insider Monkey held stakes worth $7.23 billion in Carvana Co. (NYSE:CVNA). The company’s leading shareholder during the quarter was Chase Coleman and Feroz Dewan’s Tiger Global Management LLC, which owned 5.79 million shares worth $897.9 million.

Here is what CAS Investment Partners has to say about Carvana Co. (NYSE:CVNA) in its Q1 2022 investor letter:

“In his 2016 essay The Agony of High Returns, Morgan Housel lays out the experience of owning the best performing stocks of the prior decades. His point, articulated elegantly and demonstrated compellingly, is that the owners of the best performing stocks invariably must endure many, often substantial drawdowns. The simple fact is stocks do not rise in straight lines.

We are in the midst of one of the more substantial drawdowns since the inception of the partnership. That these sorts of drawdowns are to be expected and are a normal part of investing over the long term does not make them fun.

While a number of our holdings are generally progressing well and the stocks appear to be down for no obvious identifiable business reasons, our largest holding, Carvana, is in the midst of a confluence of challenges that obscure what I believe to be its very bright future. It is my observation from business history that few great businesses are built without mistakes, setbacks and challenges. In retrospect, these challenges appear obviously soluble taking the form of mere blips on the path of a company’s inexorable rise. In the moment, however, they can appear insurmountable and terrifying.

Carvana’s challenges, especially when coupled with the precipitous decline in its stock price, clearly seem terrifying, however as I will explain in this letter, I believe that in due time we will look back at them as bumps in road on the company’s path to success…” (Click here to see the full text)

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

Number Of Hedge Fund Holders: 56

Lithia Motors, Inc. (NYSE:LAD) is an American nationwide automotive dealership group headquartered in Medford, Oregon. One of the largest providers of personal transportation solutions in the U.S., it is also among the fastest growing companies in the Fortune 500.

Lithia Motors, Inc. (NYSE:LAD) released its better-than-expected earnings report for the fiscal first quarter of 2022 on April 20. The company reported an EPS of $11.96, beating market estimates by $1.62. The automobile retailer also generated quarterly revenues that amounted to $6.71 billion, an increase of 54.39% on a year-over-year basis, surpassing the market consensus by $363.33 million.

On April 21, Guggenheim analyst Ali Faghri raised the price target on Lithia Motors, Inc. (NYSE:LAD) to $578 from $542 and maintained a Buy rating on the shares of the company while reiterating the stock as a “Best Idea”. The analyst believes that the company can “conservatively” grow its earnings at a low-teens percentage compound annual growth rate through 2025, and foresees EPS for the fiscal year 2023 to potentially exceed $50.

The investor sentiment for the stock has largely been positive, making Lithia Motors, Inc. (NYSE:LAD) one of the best used car stocks out there. At the end of the fourth quarter of 2021, 56 hedge funds in the database of Insider Monkey held stakes worth $2.64 billion in Lithia Motors, Inc. (NYSE:LAD). Of these, David Abrams’ Abrams Capital Management held the largest stake in the company, with a position worth $698.15 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.”

You can also take a look at 15 Best Technology Stocks To Buy Now and 12 Safe Stocks To Buy For Beginner Investors.

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10 Best Used Car Stocks To Invest In

Published on May 16, 2022 at 8:56 am by Sheryar Siddiq in Hedge Funds, News

Best Used Car Stocks To Invest In