In this article, we discuss the 5 best used car stocks to invest in. If you want to read our comprehensive analysis of these stocks and the current market situation, go directly to 10 Best Used Car Stocks To Invest In.
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.
