In this article, we will explore the 10 best used car stocks to buy according to hedge funds.
Used Car Prices Decline: What Buyers Need to Know
The used car market plays a vital role in the automotive industry by providing affordable vehicle options. The market also supports economic growth by creating jobs in sales, financing, and maintenance while promoting sustainability through the reuse of vehicles. According to IMARC Group, the United States used car market size reached 36.1 million units in 2023. Looking forward, the market is expected to grow at a compound annual growth rate (CAGR) of 3.5% during 2024-2032 to reach 50.36 million units by the end of the forecasted period.
The used car market is experiencing notable changes as prices have continued to decline, creating a more favorable environment for buyers. In Q2 2024, the average price of used vehicles fell by 6.8% year-over-year, dropping from $29,382 to $27,319, according to data from Edmunds.
Despite this decline in used car values, the average time it takes to sell a used vehicle remains almost unchanged at around 35 days, indicating that while prices are lower, demand is still consistent. On the other hand, the average days to turn for new vehicles rose to 53 days in Q2 2024, up from 37 days in Q2 2023. This trend reflects broader dynamics in the automotive market, particularly as new car inventory levels rise.
This buildup of new cars has prompted dealers to offer discounts and incentives on older inventory, which in turn affects the values of newer used vehicles. As prices for used cars trend downward, consumers are presented with more affordable options, making it an advantageous time for buyers in the used car market.
Fed’s Rate Cut and the Car Market
The Federal Reserve recently cut U.S. short-term borrowing costs by half a percentage point, marking its first rate reduction in four years. The new key rate now stands at 4.75%-5.00%. This significant move aims to alleviate financial pressures on consumers amid concerns about a cooling labor market and high inflation, which the Fed has been combating for over two years.
The recent rate cut could eventually boost new vehicle sales. However, on September 30, CNBC reported that experts caution the effects on auto loan rates may not be immediate or substantial. Currently, auto loan rates remain high, with averages exceeding 9.61% for new cars and nearly 14% for used vehicles, according to Cox Automotive. Jonathan Smoke, chief economist at Cox Automotive, notes that although conditions are expected to improve compared to the previous year, affordability challenges will persist. He highlights that interest rates will still be more than two and a half percentage points higher than the average levels seen over the past 24 years.
While a half-percentage-point reduction is a positive step, analysts indicate that consumers might not see substantial changes in borrowing costs so soon. Smoke pointed out that auto loan rates are influenced by longer-term bond yields and the performance of loans. As a result, auto loan rate changes can be delayed.
With a clearer understanding of the dynamics in the US car market, let’s now turn our attention to the 10 best used car stocks to buy according to hedge funds.
An auto warehouse filled with newly acquired used cars.
Methodology
To compile our list of the 10 best used car stocks to buy according to hedge funds, we used the Finviz and Yahoo stock screeners to find the largest used car companies. We also reviewed various online resources for additional insights. From this initial pool of more than 20 used car stocks, we focused on the top 10 stocks most favored by institutional investors. The stocks are ranked in ascending order based on the number of hedge funds holding stakes in them as of Q2 2024.
At Insider Monkey we are obsessed with the stocks that hedge funds pile into. 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).
10 Best Used Car Stocks To Buy According to Hedge Funds
10. ACV Auctions Inc. (NASDAQ:ACVA)
Number of Hedge Fund Investors: 24
ACV Auctions Inc. (NASDAQ:ACVA) is a leading online platform that leverages data and technology to facilitate the buying, selling, and valuing of used cars and other vehicles. The company offers a digital marketplace that includes core auction services and additional features like ACV Transportation and ACV Capital. ACV provides detailed insights into vehicle conditions and values, helping dealers make informed decisions. With a mission to transform the automotive industry, the company aims to create a trusted and efficient marketplace for used vehicles, offering tools such as vehicle inspections and marketplace enablement to enhance transparency and efficiency in transactions.
In Q2 2024, ACV reported impressive financial performance, selling 187,000 vehicles, which marks a 22% increase compared to the same period in 2023. The company achieved revenue of $161 million, reflecting a significant 29% year-over-year growth, driven by strong listing growth and high conversion rates. Additionally, the average revenue per unit (ARPU) increased by 9%, demonstrating the value ACV Auctions Inc. (NASDAQ:ACVA) is delivering to the market.
Marketplace and service revenue reached $144 million, up 32% compared to Q2 2023. This growth indicates ACV’s successful strategy in expanding its digital marketplace offerings and enhancing dealer services.
ACV Auctions Inc. (NASDAQ:ACVA) is investing in improving its service offerings through various innovative initiatives while also enhancing the dealer experience and expanding its market reach. The company is piloting a new financing option that allows dealers to source consumer vehicles and trade-ins, which can then be sold on its wholesale marketplace. This new offering, combined with the existing ClearCar vehicle inspection system, supports dealers in optimizing their vehicle sourcing strategies. Additionally, ACV is investing in technology to boost marketplace conversion rates, including features like advanced search and AI-enabled pricing data. These innovations are designed to provide dealers with accurate pricing and streamline the appraisal process, ultimately driving growth and improving operational efficiency.
The company’s commitment to expanding its suite of services and solutions positions it well for future growth, suggesting potential for significant returns for investors looking to capitalize on the evolving automotive market.
ACVA is one of the best used car stocks to buy according to hedge funds. According to Insider Monkey’s Q2 database of over 900 hedge funds, 24 hedge funds held stakes in ACV Auctions Inc. (NASDAQ:ACVA). As of June 30, Atreides Management holds 7.83 million shares of the company, valued at $142.94 million, making it ACVA’s most prominent shareholder.
Meridian Funds stated the following regarding ACV Auctions Inc. (NASDAQ:ACVA) in its first quarter 2024 investor letter:
“ACV Auctions, Inc. operates a digital wholesale auction marketplace to facilitate business-to-business used car sales between sellers and dealers. It has disrupted the traditional physical used-car auction marketplace by attracting thousands of dealers to its online platform. ACV’s competitive advantage is its sizeable team of inspectors and the technology tools supporting this team. The depth and accuracy of ACV’s inspection reports provide buyers the confidence to bid aggressively, knowing that they are unlikely to contend with negative post-purchase surprises. Sellers are drawn to ACV due to its lower auction fees and large buyer base. The stock appreciated during the quarter on strong results and 2024 guidance that came in well ahead of expectations. After a challenging 2-year period characterized by low dealer inventories and high car prices, new and used car markets are showing signs of normalization. We expect ACV to continue growing market share and to generate higher margins as volumes return closer to normal (volumes remain approximately 40% below pre-pandemic levels). The company is also well positioned as the market continues to migrate from legacy physical auctions toward ACV’s more efficient digital platform. As fundamentals continued to improve during the quarter, we maintained a large position in the company.”
Analysts are also bullish on ACVA and have a consensus buy rating on the stock. The 12-month median price target of $23.00 set by analysts indicates a potential upside of 17% from current levels.
9. Penske Automotive Group Inc. (NYSE:PAG)
Number of Hedge Fund Investors: 28
Penske Automotive Group Inc. (NYSE:PAG) is a leading international transportation services company and one of the largest automotive and commercial truck retailers globally. The company operates dealerships in the United States, Canada, the United Kingdom, Germany, and Italy. In addition to new and used vehicle sales, Penske distributes commercial vehicles, diesel and gas engines, and power systems primarily in Australia and New Zealand. Furthermore, the company holds a 28.9% stake in Penske Transportation Solutions, which manages a fleet of over 431,000 trucks and trailers, providing innovative transportation solutions across North America.
The company’s diverse operations across multiple countries and its strong market presence in commercial vehicles enhance its overall stability and profitability.
Penske Automotive Group Inc. (NYSE:PAG) reported strong financial performance in Q2 2024, achieving record quarterly revenue of $7.7 billion, a 3% increase year-over-year. The company’s diversification strategy has paid off, with significant growth in retail automotive and commercial truck businesses. During the quarter, Penske delivered a total of 126,653 new and used units. Notably, service and parts revenue reached a record $753 million, up 10% year-over-year. Additionally, the gross profit per new vehicle retailed improved by $73, reflecting operational efficiency.
On July 16, 2024, Penske Automotive Group Inc. (NYSE:PAG) announced the acquisition of Bill Brown Ford in Livonia, Michigan, which is recognized as one of the world’s largest Ford dealerships by sales volume. This strategic acquisition is expected to add approximately $550 million in annualized revenue and enhance Penske’s presence in Michigan’s largest county by population. The deal includes over 200,000 square feet of facilities, including a main dealership and a collision center, allowing the company to leverage Bill Brown Ford’s established reputation and community relationships.
Earlier, on June 4, 2024, Penske completed its acquisition of Porsche Centre Brighton and Porsche Centre Doncaster in Melbourne, Australia, expanding its portfolio to a total of 24 Porsche dealerships worldwide. This acquisition is projected to contribute an additional $130 million in annualized revenue. Together, these acquisitions reflect Penske Automotive Group Inc.’s (NYSE:PAG) commitment to growth through strategic investments and its focus on enhancing its automotive retail footprint across key markets.
According to Insider Monkey’s database, 28 hedge funds held stakes in Penske Automotive Group Inc. (NYSE:PAG) during the second quarter of 2024, with a total investment value of $251.81 million. GAMCO Investors is the largest shareholder, owning a position worth $63.32 million as of June 30.