In this article, we discuss 5 best small cap automotive stocks to buy. If you want to read our detailed discussion on the automotive industry, head over to 10 Best Small Cap Automotive Stocks To Buy.
5. America’s Car-Mart, Inc. (NASDAQ:CRMT)
Number of Hedge Fund Holders: 12
America’s Car-Mart, Inc. (NASDAQ:CRMT) is an automotive retailer that specializes in selling older model used vehicles and offering financing options to its customers. The company was established in 1981 and is headquartered in Rogers, Arkansas. America’s Car-Mart, Inc. (NASDAQ:CRMT) is one of the best automotive stocks to watch. On May 24, the company FQ4 GAAP EPS of $0.32 and a revenue of $388.3 million. Revenue for the quarter increased 12.2% year-over-year and outperformed Wall Street estimates by $20.37 million.
According to Insider Monkey’s first quarter database, 12 hedge funds were bullish on America’s Car-Mart, Inc. (NASDAQ:CRMT), compared to 13 funds in the prior quarter. Adam Peterson’s Magnolia Capital Fund is the largest stakeholder of the company, with 725,500 shares worth $57.4 million.
Here is what Merion Road Capital specifically said about America’s Car-Mart, Inc. (NASDAQ:CRMT) in its Q3 2022 investor letter:
“During the quarter I initiated a position in America’s Car-Mart, Inc. (NASDAQ:CRMT). CRMT is a used auto retailer and financing company serving low-end consumers. Given their focus on rural areas with limited public transportation, CRMT offers an essential service – a way for poor credit quality customers to get to work. As you might expect, loan charge-offs have averaged 25% annually and typically occur when a customer loses their job or the car breaks down. To offset this risk, CRMT charges a hefty 16% annual rate.
You might wonder why I would buy this given the economic sensitivity of the low-end consumer and falling auto prices. Should unemployment pick-up we will likely see increasing loss incidence rates. And with falling auto prices it would be logical to assume that their upfront margins would compress and loss recovery rates would fall.
Over the past two decades CRMT loss reserves peaked two times to the 32-35% range. In both of these periods CRMT loss expenses exceeded actual charge-offs of 30-33% as the company had to increase their balance sheet reserves. The good news is that, today, balance sheet reserves are already at the high end of the range at 22.4%. Even considering those previous catch-ups, CRMT has been profitable every year over this time frame. Of course, it is entirely possible that we enter another period of high charge-offs. But these are relatively short-term loans (42 months on average) where the majority of defaults occur within the first twelve months. Given the quick turnaround, CRMT has the opportunity to adjust its underwriting standards in real time. As of last quarter loan’s delinquent 30 days or more stood at 3.6%, slightly below the long-term average. Furthermore, in April of this year the company financed half of their loans via a non-recourse securitization. Not only does this diversify their funding sources, but it also helps ringfence some risks to the enterprise…” (Click here to read the full text)
