We recently compiled a list of the 7 Best Small Cap Automotive Stocks to Buy. In this article, we are going to take a look at where Holley Inc. (NYSE:HLLY) stands against the other small cap automotive stocks.
The International Automotive Industry
The automotive industry is one of the fastest-growing industries, especially with the recent surge in demand for Electric Vehicles (EVs) across the globe. According to a report published by Fintech Futures, the global automotive industry was valued at $4.4 trillion in 2024. The market is expected to grow at a compound annual growth rate of 5.66% to reach $6.7 trillion by 2032. The recent trend of EVs, autonomous vehicles, and innovative technology has revolutionized the automotive sector. The transformation is expected to boost auto revenues by nearly 30% during the projected period.
The international automotive industry market share has been changing drastically during the year. According to a CNBC report published on June 14, Chinese automakers have overtaken the US in terms of sales for the first time. Chinese automakers, led by BYD, sold 13.4 million new vehicles in 2023 surpassing 11.9 million vehicles sold by their US counterparts. On the other hand, the Japanese automotive industry stood undefeated by selling 23.59 million new vehicles during the same year. Moreover, China’s sales growth also outperformed that of the US. The country grew its automotive sales by 23% during the year as compared to a 9% growth by the US.
China has been focusing on growing its exports of the automotive industry to capture the international market. According to another CNBC report published on June 27 Chinese automakers are expected to achieve 33% of the global automotive market share by 2030. As of 2024, China has already captured 21% market share and sales of automobiles outside of China are expected to grow from 3 million this year to 9 million by 2030. Currently, around 59% of Chinese automotive sales come from within the country, with Russia being the largest market for Chinese automotive at 33%. If you want to read more about automotive industry trends you can look at the Top 18 Automotive Industry Innovations and Trends.
The US Automotive Industry Outlook
The United States is one of the key players in the international market. According to a report by Alliance for Automotive Innovation, the sales of new vehicles in the month of June dropped 3.4% year-over-year amounting to 1.32 million. The slow down in the sales is mainly attributed to higher prices and interest rates that hinder a stronger market. However, the full year sales estimates look better, with new vehicle sales expected to reach 16.1 million during the year, indicating a 12.4% increase from last year. On the other hand, on June 25 Reuters reported that uncertainty looms in the US automotive industry as the upcoming elections are expected to reshape the US economy. Cox Automotive reiterated its full year 2024 guidance at 15.7 million units.
The US consumer market has been reluctant to purchase vehicles due to inflation, and some shoppers are expected to keep holding back due to election uncertainty. As per Reuters, around 74% consumers and 81% dealers believe that inflation is the top concern and that the election is likely to influence it. This has led to a sell-off in auto stocks and many companies with strong fundamentals are now available at cheaper prices. With that, let’s now look at the 7 best small cap automotive stocks to buy.
Our Methodology
To compile the list of best small cap automotive stocks to buy we used Yahoo Finance and Finviz stock screeners. We set the market cap range between $250 million to $2 billion to get small cap stocks only. We checked auto manufacturers, auto and truck dealerships, and also auto parts for this article. Once we had a consolidated list of small cap automotive stocks, we selected and ranked the stocks that were the most widely held by institutional investors, as of Q1 2024. The list is in ascending order of the number of hedge funds holders for each stock.
Why do we care about what hedge funds do? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
A professional race car driving around a track with a crowd of cheering fans.
Holley Inc. (NYSE:HLLY)
Number of Hedge Funds Holders: 20
Holley, Inc. (NYSE:HLLY) is one of the best small cap automotive stocks. It is a leading designer, manufacturer and seller of high-performance aftermarket products for car and truck enthusiasts and sells its products in the United States, Europe, China, and Canada. The company generates revenue through 5 business segments including electronic systems, mechanical systems, exhausts, accessories, and safety equipment. Holly, Inc. (NYSE:HLLY) employs an omni-channel distribution strategy to sell its products including Direct to Consumer (DTC), warehouse distribution, e-tailers, traditional retailers, and installer channels. The competitive edge of Holley, Inc (NYSE:HLLY) lies in its robust portfolio of iconic brands including Holley, MSD, Simpson, Flowmaster and more than 50 others, that allows the company to operate in major automotive aftermarket segments ranging from domestic muscle enthusiasts to safety and racing products.
HLLY is an investor’s favorite stock; it was held by 20 hedge funds in Q1 2024 with total stakes worth $21.7 million. Leucadia National is the top shareholder in the company, as of Q1, and disclosed a stake worth $8.4 million. During the first quarter of 2024, Holley Inc. (NYSE:HLLY) demonstrated its ability to navigate profitability through tough market conditions. The company experienced a decline of 7.9% in its net sales, with revenue dropping to $158.6 million. The decline in sales was mainly due to weak consumer demand and an overall softening of consumer environment. However, regardless of a decline in net sales, Holley, Inc. (NYSE:HLLY) was able to maintain robust margins, with gross margins at 32.8% and adjusted gross margins at 38.9% during the quarter. In terms of earnings, the company posted an adjusted EBITDA of 19.3% and also grew its free cash flow by $15 million year-over-year. The growth in free cash flow was mainly due to management’s efforts to optimize inventory and working capital. Moreover, the company is also working towards stabilizing its debt position, it not only reduced its debt by $15 million during the quarter but also indicated its exit from the covenant relief period by the end of the second quarter.
Is Holley, Inc. (NYSE:HLLY) a profitable investment?
It’s true that the company faced some headwinds in terms of decline in sales during the previous quarter and an overall softening consumer demand. However, what’s noteworthy is the company’s ability to drive profitability during challenging market conditions. The company has grown its revenue and levered free cash flow by 5% and 20% during the past 5 years. Moreover, management has been working on improving its product line-up during the previous quarter and is ready to introduce innovative products across all business segments. The full-year outlook by management also remains positive with net sales between $640 million to $680 million and adjusted EBITDA between $125 million and $145 million.
HLLY is currently trading at 15 times its forward earnings, at a slight premium to its sector. However, it still presents an attractive entry point for value investors because its earnings are expected to grow by 100% this year to reach $0.06. Moreover, over $41 million in cash and cash equivalents on the balance sheet can be used for growth. Analysts hold a consensus Buy opinion on the stock and their average price target of $7 implies an upside of 95% from current levels.
Overall HLLY ranks 5th on our list of the best small cap automotive stocks to buy. You can visit 7 Best Small Cap Automotive Stocks to Buy to see the other small cap automotive stocks that are on hedge funds’ radar. While we acknowledge the potential of HLLY to grow, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than HLLY but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.
