Right Tail Capital, an investment management company, released its first quarter 2023 investor letter, a copy of the same can be downloaded here. Today, Right Tail does not own any dealerships among its limited roster of investments. The sausage is in the test kitchen, but the recipe is still being optimized. According to the fund, they take investing your wealth seriously and only want to invest when they feel it’s one of their best 10-12 ideas. The longer-term questions around the business model are their primary concerns. This research is beneficial and will stay in the Right Tail library. In fact, the majority of Right Tail’s current investments were not made immediately following the initial work. Rather, Right Tail invested later either due to uncovering additional insights about the businesses or a more attractive price. Spare some time to check the fund’s top 5 holdings to have a clue about their top bets for 2023.
In its Q1 2023 investor letter, Right Tail Capital mentioned Lithia Motors, Inc. (NYSE:LAD) and explained its insights for the company. Founded in 1946, Lithia Motors, Inc. (NYSE:LAD) is a Medford, Oregon-based car dealership company with a $6.0 billion market capitalization. Lithia Motors, Inc. (NYSE:LAD) delivered a 8.19% return since the beginning of the year, while its 12-month returns are down by -24.75%. The stock closed at $221.50 per share on April 19, 2023.
Here is what Right Tail Capital has to say about Lithia Motors, Inc. (NYSE:LAD) in its Q1 2023 investor letter:
“The original research premise fit right into Right Tail’s wheelhouse: a set of good businesses trading at attractive long-term valuations. Valuations look inexpensive at mid to high single digit multiples of earnings. Historically, these businesses have traded at 10-15x P/E multiples despite having more leverage and holding more inventory than they do today. In some ways, the historical multiples feel appropriate given their delicate relationships with manufacturers and cyclicality; on the other hand, these businesses have produced solid mid-teens returns with attractive reinvestment opportunities suggesting they are better than average companies. Adding another wrinkle to the puzzle, these businesses have over-earned the last few years due to Covid (car shortages, consumers flush with cash, etc.).
As I began the work, the compelling return potential warranted additional research. Lithia Motors (LAD), for example, has laid out a 2025 earnings per share target of $55-60. If the company reaches $55 in earnings and trades at a 12x P/E, we’d have a stock price of $660 – this would be a triple from today’s prices and produce a ~45% IRR over 3 years. The businesses are also producing lots of cash currently (LAD has earned ~$40 per share the last few years) creating additional capital allocation optionality.”
Photo by carlos aranda on Unsplash
Our calculations show that Lithia Motors, Inc. (NYSE:LAD) fell short and didn’t make it on our list of the 30 Most Popular Stocks Among Hedge Funds. Lithia Motors, Inc. (NYSE:LAD) was in 40 hedge fund portfolios at the end of the third quarter of 2022, compared to 45 funds in the previous quarter. Lithia Motors, Inc. (NYSE:LAD) delivered a -3.66% return in the past 3 months. You can find other investor letters from hedge funds and prominent investors on our hedge fund investor letters Q1 2023 page.
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Disclosure: None. This article is originally published at Insider Monkey.
