10 Best Used Car Stocks To Buy Now

Published on October 24, 2022 at 3:03 pm by Hamna Asim in Hedge Funds, News

In this article, we discuss 10 best used car stocks to buy now. If you want to see more stocks in this selection, check out 5 Best Used Car Stocks To Buy Now.

New car inventory is nearly half of what it should be, and dwindling inventories are an indicator of tight supply and demand. Inventories are low because of COVID-19 production disruptions and supply chain constraints. Inventories will normalize gradually, as automakers are not rushing to overproduce vehicles, especially with the aggressive interest rate environment. According to the Manheim Used Vehicle Index, used car prices are up about 45% from pre-pandemic levels, and Federal Reserve data indicated that new-car prices are up about 20% from pre-pandemic levels.

RBC Capital Markets analyst Joseph Spak wrote in an investor note last week that although auto sentiment is “very poor” due to rampant rate hikes, high prices, low consumer confidence, a looming recession, and a European energy crisis heading into colder months, earnings for the third quarter of 2022 “should mostly be fine,” as market experts focus on management commentary and guidance revisions in the auto sector. He noted that 2023 estimates for the sector need to “move materially lower.”

Although the new and used car industry is going through a rough phase, the auto sector has proven to be resilient over the years and can be a good long-term investment. Used car stocks such as Copart, Inc. (NASDAQ:CPRT), Lithia Motors, Inc. (NYSE:LAD), and CarMax, Inc. (NYSE:KMX) make for smart portfolio additions, especially as they are trading at discounts currently.

Our Methodology

We selected the following used car stocks based on optimistic analyst coverage, strong underlying business fundamentals, and future growth prospects once the auto industry gains momentum. We have assessed the hedge fund sentiment from Insider Monkey’s database of 895 elite hedge funds tracked as of the end of the second quarter of 2022.

Photo by Malusi Msomi on Unsplash

Best Used Car Stocks To Buy Now

10. Sonic Automotive, Inc. (NYSE:SAH)

Number of Hedge Fund Holders: 20

Sonic Automotive, Inc. (NYSE:SAH) was incorporated in 1997 and is based in Charlotte, North Carolina. It operates as an automotive retailer in the United States, with two primary segments – Franchised Dealerships and EchoPark. The Franchised Dealerships segment is involved in the sale of new and used cars and light trucks, replacement parts, vehicle maintenance, manufacturer warranty repair, arrangement of extended warranties, service contracts, financing, insurance, and other aftermarket products for its customers.

On October 6, JPMorgan analyst Rajat Gupta upgraded Sonic Automotive, Inc. (NYSE:SAH) to Overweight from Neutral with a $60 price target. The analyst noted the setup for franchise auto dealers into Q3 earnings is the most negative he has witnessed since the pandemic. He upgraded Sonic Automotive, Inc. (NYSE:SAH) based on his revised price targets for the group.

According to Insider Monkey’s data, 20 hedge funds were long Sonic Automotive, Inc. (NYSE:SAH) at the end of June 2022, compared to 23 funds in the prior quarter. Michael Moriarty’s Teewinot Capital Advisers is the largest stakeholder of the company, with 575,326 shares worth $21 million.

In addition to Copart, Inc. (NASDAQ:CPRT), Lithia Motors, Inc. (NYSE:LAD), and CarMax, Inc. (NYSE:KMX), Sonic Automotive, Inc. (NYSE:SAH) i s one of the best used car stocks to invest in.

9. CarGurus, Inc. (NASDAQ:CARG)

Number of Hedge Fund Holders: 23

CarGurus, Inc. (NASDAQ:CARG) is a Massachusetts-based company that operates an online automotive marketplace where buyers and sellers can trade new and used cars in the United States and internationally. On October 3, CarGurus, Inc. (NASDAQ:CARG) announced that it has chosen Amazon Web Services as its global cloud infrastructure provider. The multi-year deal is expected to allow customers an enhanced experience on the CarGurus website. CarGurus, Inc. (NASDAQ:CARG) is one of the best used car stocks to consider.

On October 18, Truist analyst Naved Khan reaffirmed a Buy rating on CarGurus, Inc. (NASDAQ:CARG) but trimmed the price target on the shares to $31 from $38. The company’s Q3 results are expected to be in-line with his lowered expectations, which largely factor in the negative impact on CarOffer from wholesale price drops and soft retail demand, as per the analyst.

According to Insider Monkey’s data, 23 hedge funds were long CarGurus, Inc. (NASDAQ:CARG) at the end of the second quarter of 2022, compared to 29 funds in the last quarter. Paul Reeder and Edward Shapiro’s PAR Capital Management is the largest stakeholder of the company, with 4 million shares worth $88 million.

8. Group 1 Automotive, Inc. (NYSE:GPI)

Number of Hedge Fund Holders: 24

Group 1 Automotive, Inc. (NYSE:GPI) is a Texas-based company that operates in the automotive retail industry, dealing in new and used cars, light trucks, vehicle parts, service and insurance contracts, vehicle financing, and automotive maintenance and repair services. The shares have gained close to 6% in the last month, making Group 1 Automotive, Inc. (NYSE:GPI) a great prospect for value-oriented investors.

JPMorgan analyst Rajat Gupta on October 6 upgraded Group 1 Automotive, Inc. (NYSE:GPI) to Overweight from Neutral with a $210 price target. The analyst said the sector is not immune to the current macro challenges, and he cut estimates for 2023 “materially” to reflect a mild recession. He believes the auto industry will achieve a new normal by 2025 and upgraded Group 1 Automotive, Inc. (NYSE:GPI) based on his revised price targets for the group.

Among the hedge funds tracked by Insider Monkey, Group 1 Automotive, Inc. (NYSE:GPI) was part of 24 public stock portfolios at the end of June 2022, compared to 25 funds in the earlier quarter. Anthony Bozza’s Lakewood Capital Management is the biggest position holder in the company, with 328,726 shares valued at $55.8 million.

Here is what ClearBridge Investments Small Cap Value Strategy has to say about Group 1 Automotive, Inc. (NYSE:GPI) in its Q1 2022 investor letter:

“We also initiated a new position in Group 1 Automotive (NYSE:GPI), in the consumer discretionary sector. Group 1 Automotive is one of the leading auto dealership groups in the U.S. and the U.K. Through our analysis, we believe the current stock price already discounts a considerable decline in revenue and profits due to concerns about elevated used car prices and high gross margins per unit. However, we believe this does not reflect the underlying strength of the company’s diversified business line and flexible cost structure. Ultimately, we believe the company will prove more durable than the market expects and be a long-term value creator for the portfolio.”

7. ACV Auctions Inc. (NASDAQ:ACVA)

Number of Hedge Fund Holders: 24

ACV Auctions Inc. (NASDAQ:ACVA) is a New York-based company that connects buyers and sellers for the online auction of wholesale vehicles. It also provides data services to determine the condition and value of used vehicles, in addition to customer financing services. ACV Auctions Inc. (NASDAQ:ACVA) is one of the leading used car stocks to buy now.

On October 6, Jefferies analyst John Colantuoni maintained a Buy rating on ACV Auctions Inc. (NASDAQ:ACVA) but slashed the price target on the shares to $15 from $17. The analyst trimmed estimates and price targets across U.S. internet in anticipation of a slowing macro environment. However, the correction across the internet sector has created more attractive risk/reward, and ACV Auctions Inc. (NASDAQ:ACVA) offers the most feasible long-term growth profile, contended the analyst.

Among the hedge funds tracked by Insider Monkey, 24 funds were long ACV Auctions Inc. (NASDAQ:ACVA) at the end of the second quarter of 2022, compared to 34 funds in the earlier quarter. Gavin Baker’s Atreides Management is the largest position holder in the company, with nearly 8 million shares worth $52 million.

Here is what Meridian Funds specifically said about ACV Auctions Inc. (NASDAQ:ACVA) in its Q2 2022 investor letter:

“ACV Auctions Inc. (NASDAQ:ACVA) 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 sizable 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 be negatively surprised post purchase. Sellers are drawn to ACV because of its lower auction fees and large buyer base. Despite a challenging operating environment, ACV reported a 49% increase in first-quarter revenue, which was significantly faster than its physical auction peers, implying robust market share gains. However, sentiment for ACV’s stock cooled amid the company’s aggressive investments in its business, which are likely to result in negative free cash flow for the next few years. Further pressuring the stock were concerns that demand for used cars will decline as supply chain disruptions ease and new car production picks up. Our long-term conviction in the company remains high due to its strong fundamentals, healthy balance sheet, and increasing market share. Furthermore, we believe the sale of ADESA, one of ACV’s largest physical auction competitors, to online used-car platform Carvana could provide a tailwind to ACV. Carvana is viewed by used car dealers as a direct competitor, likely causing them to shift volumes from ADESA to ACV. Based on our favorable long-term outlook for the company, we added to our position during the quarter.”

6. Asbury Automotive Group, Inc. (NYSE:ABG)

Number of Hedge Fund Holders: 27

Next on our list of the best used car stocks is Asbury Automotive Group, Inc. (NYSE:ABG), a Georgia-based automotive retailer that offers a range of automotive products and services, including new and used vehicles, vehicle repair and maintenance services, replacement parts, and collision repair services.

On October 6, investment advisory JPMorgan maintained a Neutral rating on Asbury Automotive Group, Inc. (NYSE:ABG) and lowered the price target on the shares to $185 from $205. Analyst Rajat Gupta issued the ratings update.

According to the second quarter database of Insider Monkey, 27 hedge funds held stakes worth $1.09 billion in Asbury Automotive Group, Inc. (NYSE:ABG), compared to 29 funds in the prior quarter worth $926 million. Lauren Taylor Wolfe’s Impactive Capital is the largest stakeholder of the company, with 2.20 million shares valued at $372.5 million.

Like Copart, Inc. (NASDAQ:CPRT), Lithia Motors, Inc. (NYSE:LAD), and CarMax, Inc. (NYSE:KMX), Asbury Automotive Group, Inc. (NYSE:ABG) is one of the top stocks to consider for exposure to the auto industry.

Here is what LRT Capital Management has to say about Asbury Automotive Group, Inc. (NYSE:ABG) in its Q1 2022 investor letter:

“Asbury Automotive Group is one of the largest automotive retailers in the United States. It operates 90 dealerships consisting of 112 franchises and 25 collision repair centers. The company’s stores offer new and used vehicles, parts, and service, as well as finance and insurance (F&I) products. Franchise agreements controlled by automotive manufactures and state laws create an environment of tightly controlled market entry and restricted competition.

The dealership industry is highly fragmented with 93.5% of dealers having only between 1-5 locations according to data from 2020. In fact, dealers with over 50 locations account for only 0.1% of the industry – a testament to the huge opportunity for consolidation that lies ahead. Industry dynamics, including the rising complexity of automobiles and the need for omnichannel distribution are favoring better capitalized and larger dealer groups. We believe Asbury Automotive Group has several distinct advantages, particularly its highly profitable parts and service business, its overexposure to the luxury vehicle business, which carries the best margins, and its Clicklane omnichannel strategy. Asbury’s management has also been acting in the best interests of its shareholders by allocating capital towards acquiring dealerships to aggressively expand its business, and occasionally repurchasing stock when attractive acquisitions targets could not be found.

ABG is not a fast-growing SaaS business, but when paying a valuation of ¼ of the overall stock market, one does not need to make heroic assumptions about the future to enjoy strong returns as shareholders. We believe that over the next several years, Asbury will continue to acquire dealerships, occasionally buy back stock and invest to improve its digital shopping experience. We wrote about Asbury in detail in our August 2021 Investor Letter.”

Click to continue reading and see 5 Best Used Car Stocks To Buy Now.

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Published on October 30, 2024 at by Inan Dogan, PhD

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