Black Bear Value Partners recently released its Q3 2020 Investor Letter, a copy of which you can download here. The fund posted a return of -22.3% (net) in the first nine months of 2020, underperforming its benchmark, the S&P 500 Index which returned 5.6% in the same period. You should check out Black Bear Value Partners’ top 5 stock picks for investors to buy right now, which could be the biggest winners of this year.
In the said letter, Black Bear Value Partners highlighted a few stocks and AutoNation Inc. (NYSE:AN) is one of them. AutoNation Inc. (NYSE:AN) is an automotive retailer. Year-to-date, AutoNation Inc. (NYSE:AN) stock gained 26.0% and on October 12th it had a closing price of $60.45. Here is what Black Bear Value Partners said:
“Despite COVID, AutoNation and the auto dealer industry are experiencing a record year. The 2nd quarter was the best earnings performance in the company’s history. While new and used car volumes are down, dealers have been able to increase profit margins due to a variable cost operating model and lower inventories.
Auto dealers have a large variable component to their expense base as they can reduce headcount, ad spending and other costs when business slows. We saw evidence of this in 2008 which repeated in the 1st half of 2020. Their ability to reduce costs was far in excess of what I had thought which was a pleasant surprise.
AutoNation has been testing used car supercenters called AutoNation USA over the last 2 years. Given its’ success they are investing an incremental $200MM to open another 20 over the coming 3 years. This is another potential area of growth for the company.
There is a lot of focus on online car shopping disintermediating traditional retailers like AutoNation in the used car market. Note that most traditional dealers have pivoted to online fulfillment. The legacy dealers have an inherent advantage both in terms of sourcing cheap cars from trade in and scale/density of existing dealerships to transport cars. Additionally, the cash produced by the parts and service business allow AN to reinvest in other methods of customer fulfillment whether they be online, in person, or omnichannel.
The 1-2 lot dealers will likely be the ones to suffer as they lack scale and density. The short-term disruptions to the business from COVID will accelerate changes and benefit those who have (AN) and hurt those who do not (smaller dealers).
AutoNation can generate a range of $4.00-$7.00 in free cash flow per year. This implies an 8-13% yield to us presuming limited growth. My expectations for AutoNation’s prospects have gradually improved as I see them effectively addressing costs and reinvesting in areas of growth.”
In Q2 2020, the number of bullish hedge fund positions on AutoNation Inc. (NYSE:AN) stock increased by about 7% from the previous quarter (see the chart here), so a number of other hedge fund managers seem to agree with AutoNation’s growth potential. Our calculations showed that AutoNation Inc. (NYSE:AN) isn’t ranked among the 30 most popular stocks among hedge funds.
The top 10 stocks among hedge funds returned 185% since the end of 2014 and outperformed the S&P 500 Index ETFs by more than 109 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. Below you can watch our video about the top 5 hedge fund stocks right now. All of these stocks had positive returns in 2020.
Video: Top 5 Stocks Among Hedge Funds
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Disclosure: None. This article is originally published at Insider Monkey.