In this article, we discuss 5 best used car stocks to buy according to hedge funds. If you want to read a detailed analysis of the used cars industry, go directly to the 10 Best Used Car Stocks To Buy According to Hedge Funds.
5. AutoNation Inc (NYSE:AN)
Market cap as of March 24: $5.93 Billion
Number of Hedge Fund Holders: 34
AutoNation, Inc. (NYSE:AN) is a US-based automotive retailer that provides a diverse array of automotive products and services such as new and used vehicles, parts, maintenance, repair services. AutoNation, Inc. (NYSE:AN) operates 247 stores with 343 new vehicle franchises, mainly in the Sunbelt region, along with 55 collision centers, 13 used vehicle stores, 4 automotive auction operations, and 3 parts distribution centers under the AutoNation brand.
Guggenheim analyst Jonathan Elias increased his price objective on AutoNation, Inc. (NYSE:AN) to $181 from $169 and maintained a ‘Buy’ rating on February 21 after the company reported better-than-expected Q4 earnings.
Black Bear Value Partners commented on AutoNation, Inc. (NYSE:AN) in its Q4 2021 investor letter:
“AutoNation is an example of what can happen when you marry excellent business operations with best-in-class capital allocation. Mike Jackson and his team have been able to reinvest in the business, grow ancillary businesses, and acquire new dealerships all while buying back TONS of stock when the opportunity presents itself (27% of the company over the trailing 12 months ending 9/30). Other companies should take notice and use AutoNation as a case study in compounding value for shareholders while also being great corporate citizens. Auto dealers have been over-earning on car sales due to a lack of inventory from the semiconductor shortage. It seems obvious that when the semiconductor shortage is resolved, more cars will become available and unit profitability will be reduced. In short, their earnings will likely decline in the 12 months following the inventory shortage and then resume their rise. Our longer-term horizon allows us the ability to own the business and not focus on a short-term issue. The semiconductor issue is likely to persist thru 2022 though this is a guess. Ultimately our long-term thesis on the business remains intact. If the business can extend its moat, maintain its pricing power, and remain important to both its customers and suppliers we will do fine. Over the last 12 months ending September 30, 2021, the company has bought back 27% of the shares at a cost of ~$81.50. Given the stock has been trading at $100+ it has been a good investment on a mark-to-market basis. More importantly, we own 27% more of the company without having to lay out a single dollar of cash. It has a dramatic impact on my estimates of free cash flow on a per-share basis. Looking forward the Company should be able to generate $10-$14 per year in free cash flow which means we likely own it somewhere between an 8-12% yield. Additionally, if AutoNation achieves modest levels of success with AutoNation USA (new used-car supercenters) it could add another $6-$12 of per-share value to the business. Note that at current prices, very little in the way of AutoNation USA’s success is priced in.”
