Is It Too Late to Buy KAR Auction Services (KAR) Stock?

Argosy Investors recently released its Q1 2021 Investor Letter, a copy of which you can read here. First-quarter 2021 performance was 8.2% in select accounts. The S&P 500 by comparison returned 7.0%. You should check out Argosy Investors’ top 5 stock picks for investors to buy right now, which could be the biggest winners of 2021.

In the Q1 2021 Investor Letter, the fund highlighted a few stocks and KAR Auction Services Inc. (NYSE:KAR) is one of them. KAR Auction Services Inc. (NYSE:KAR) is a provider of whole car auction services. In the last three months, KAR Auction Services Inc. (NYSE:KAR) stock lost 21.1% and on April 14th it had a closing price of $15.18. Here is what the fund said:

“KAR’s primary business is engaged in the auction process between dealers and owners of used vehicles (corporate fleets, auto rental companies, dealers’ trade-in vehicles, etc.). Its other business acts as a floorplan lender (they finance the cars on dealer lots until they are sold) to independent dealers, many of whom are purchasing vehicles from KAR’s auction business. I have owned a small position at around $22 per share since January 2020, right before the pandemic started.

I purchased more after the stock price recently fell into the mid-$14 range. KAR reported disappointing earnings and guidance, but I ultimately believe the company’s strong cash flows make it very cheap. I expect this company to generate about $1.40 per share in free cash flow, and that represents a 10% yield on my recent purchase price for a company that earns returns on capital approaching 20%.

There are headwinds to both businesses, mainly due to exposure to the same phenomenon. People are increasingly purchasing cars online via companies like Carvana or through sophisticated dealers such as CarMax which have their own wholesale auction functions. These companies are increasingly placing pressure on mom-and-pop dealers who cannot keep up with the pace of technological innovation occurring in the industry. While I acknowledge this risk, I do not believe this dynamic will prevent KAR from generating lots of cash flow for investors. This is more squarely in the camp of a value investment, and the “hair” on an investment like this does not prevent it from being a successful investment, though I am less likely to hold onto an investment like this for a lengthy period of time.”

Image by Varun Kulkarni from Pixabay

In Q3 2020, the number of bullish hedge fund positions on KAR Auction Services Inc. (NYSE:KAR) stock increased by about 37% from the previous quarter (see the chart here), so a number of other hedge fund managers believe in KAR’s growth potential. Our calculations showed that KAR Auction Services Inc. (NYSE:KAR) isn’t ranked among the 30 most popular stocks among hedge funds.

The top 10 stocks among hedge funds returned 231.2% between 2015 and 2020, and outperformed the S&P 500 Index ETFs by more than 126 percentage points. We know it sounds unbelievable. You have been dismissing our articles about top hedge fund stocks mostly because you were fed biased information by other media outlets about hedge funds’ poor performance. You could have doubled the size of your nest egg by investing in the top hedge fund stocks instead of dumb S&P 500 ETFs. Here you can watch our video about the top 5 hedge fund stocks right now. All of these stocks had positive returns in 2020.

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Disclosure: None. This article is originally published at Insider Monkey.