5 Best Used Car Stocks To Buy According to Hedge Funds

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.”

4. Carvana Co. (NYSE:CVNA)

Market cap as of March 24: $1.48 Billion
Number of Hedge Fund Holders: 36

Carvana Co. (NYSE:CVNA) operates a US e-commerce platform for buying and selling used cars. Customers can research, inspect, finance, purchase, and schedule delivery or pick-up using the company’s technology via desktop or mobile devices. Carvana Co. (NYSE:CVNA) shares have offered investors more than 76% in returns year-to-date.

Evercore ISI analyst Michael Montani increased his price target on Carvana Co. (NYSE:CVNA) to $10 from $9 and maintained an ‘In Line’ rating on the stock after the company pre-announced Q1 results and proposed a debt swap to restructure its balance sheet.

Hedge funds tracked by Insider Monkey having stakes in Carvana Co. (NYSE:CVNA) decreased to 36 in Q4 from 43 in the preceding quarter. These stakes hold a consolidated value of $209.84 million. Spruce House Investment Management is a significant shareholder in the company, with 10 million shares valued at $47.40 million.

Saga Partners specifically reported on Carvana Co. (NYSE:CVNA) in its second half 2022 investor letter:

“I have discussed Carvana Co. (NYSE:CVNA) several times since we first purchased it in 2019 but want to provide an update given the stock’s decline and negative headlines. Historically, Carvana has grown gross profits at a faster rate than operating costs. In 2021, Carvana grew retail unit volumes 74% to over 400,000 cars to become the second largest used car dealer after CarMax. Carvana reached $1.9 billion in gross profits, EBITDA breakeven, and expectations entering 2022 were for continued unit volume growth and scale operating costs.…” (Click here to read the full text)

3. CarMax, Inc (NYSE:KMX)

Market cap as of March 24: $9.08 Billion
Number of Hedge Fund Holders: 38

CarMax, Inc. (NYSE:KMX) is a U.S.-based company that sells used vehicles through its 240 locations. The company has two segments: CarMax Sales Operations and CarMax Auto Finance. In the previous year, the company sold over 900,000 cars to consumers.

CarMax, Inc. (NYSE:KMX), a major player in the used-car market, experienced a decline in sales and net income in the three months ending in November, with vehicle sales falling 21% to 180,000 and net income dropping 86% to $37.6 million. CarMax, Inc. (NYSE:KMX) is being cautious in acquiring cars and trucks due to declining prices, having purchased 40% fewer vehicles in its most recent quarter compared to the previous year.

JPMorgan analyst Rajat Gupta reduced his price target on CarMax, Inc. (NYSE:KMX) from $60 to $55 and maintained an ‘Underweight’ rating on the stock. He expects CarMax’s fiscal Q4 results to be below consensus due to continued challenges in the used car market, with high prices and rising rates affecting demand.

The number of hedge funds tracked by Insider Monkey with interests in CarMax, Inc (NYSE:KMX) increased from 25 hedge funds in the third quarter to 38 hedge funds in the fourth quarter.

Weitz Investment Management commented on CarMax, Inc. (NYSE:KMX) in its fourth quarter 2022 investor letter:

“Unfortunately, the performance story of the year is told by the Fund’s detractors. Higher financing costs and volatile vehicle prices have wreaked havoc on all used car sellers, but CarMax, Inc. (NYSE:KMX) shares have been doubly hit as management continues to invest in capabilities that improve the used car buying experience both online and “on the lot.”

Meta, Alphabet, Amazon and CarMax were all top detractors for the quarter and calendar year periods (FIS and Liberty Broadband, respectively, complete the quarterly and calendar-year detractor lists.) To varying degrees, each is managing through cyclical challenges during a period of substantial investor pessimism. Drawdowns of this magnitude are painful, and it may be prudent for management to moderate the pace of some investments, but we remain encouraged by their long-term focus. In the short run, cutting spending indiscriminately to “defend earnings” may lessen the pain of a drawdown, but it seldom grows a company’s business value — the ultimate prize. We added to both CarMax and Meta on weakness, and all four remain core holdings.”

2. Lithia Motors (NYSE:LAD)

Market cap as of March 24: $5.77 Billion
Number of Hedge Fund Holders: 40

Lithia Motors, Inc. (NYSE:LAD) is a major US automotive group with 282 stores in 28 states, offering 48 brands of new vehicles and all brands of used cars. One of LAD’s competitive advantages is that it also provides services such as auto financing, giving customers an advantage in finding their ideal vehicle.

Lithia Motors, Inc. (NYSE:LAD) recently acquired Jardine Motors Group in the UK, adding over $2.1 billion in annualized revenue to its expanding portfolio. Lithia aims to generate $50 billion in revenues and $55-$60 in earnings per share by 2025 through strategic acquisitions. With a diversified product mix and multiple streams of income, the company is well-positioned for long-term growth despite current macroeconomic challenges. Additionally, Lithia Motors, Inc. (NYSE:LAD) offers convenient digital services and has an expanding physical network, serving 2% of consumers.

At the end of Q4 2022, 40 hedge funds owned a stake in Lithia Motors (NYSE:LAD), down from 45 in the preceding quarter. Abrams Capital Management held a significant stake in Lithia Motors (NYSE:LAD) at the end of the fourth quarter of 2022, worth $481.4 million.

Oakmark Funds mentioned Lithia Motors (NYSE:LAD) in its Q1 2022 investor letter. Here is what the fund said:

“As is typical during periods of significant volatility, we added a new name to the portfolio. Lithia Motors (NYSE:LAD) is the largest franchised auto dealer group in the United States. The company has a long history of creating shareholder value through best-in-class operations and consistent acquisitions of smaller dealers at attractive returns. There is a long runway for management to continue creating value through such acquisitions. Management believes this will drive earnings per share to more than $50 by 2025, even as car prices return to pre-pandemic levels. Meanwhile, Lithia has a significant opportunity to further accelerate growth through Driveway, its online auto retailing platform. We believe Lithia’s existing nationwide infrastructure provides Driveway with significant competitive advantages in e-commerce, which smaller dealers will struggle to replicate. Driveway is not generating any earnings today, but it could become a major contributor over the next five to seven years. With the stock priced at less than 7x management’s 2025 EPS target and with substantial future growth potential from Driveway, we believe Lithia shares are a bargain today.”

1. Copart, Inc. (NASDAQ:CPRT)

Market cap as of March 24: $33.28 Billion
Number of Hedge Fund Holders: 48

Copart, Inc. (NASDAQ:CPRT) offers vehicle remarketing and online auctions services in 11 countries including the United States, Canada, and the United Kingdom. Its online platform utilizes innovative technology to connect buyers and sellers from all over the globe. Copart, Inc. (NASDAQ:CPRT) is headquartered in Dallas, Texas, and runs over 200 locations with a daily inventory of more than 175,000 vehicles up for auction. The main clients of Copart are insurance companies which aim to sell their damaged vehicles at the maximum value possible.

Guggenheim analyst Jonathan Elias increased his price target on Copart, Inc. (NASDAQ:CPRT) to $82 from $75 and maintained a ‘Buy’ rating on the shares on February 22. Steve Cohen’s Point72 Asset Management is the leading shareholder of Copart, Inc. (NASDAQ:CPRT), with a stake worth over $155.62 million.

According to Insider Monkey’s database, 48 hedge funds were long Copart, Inc. (NASDAQ:CPRT) as of Q4 2022. The total value of their holdings was $799.07 million. Copart, Inc. (NASDAQ:CPRT) tops the list of 10 best used car stocks to buy according to hedge funds.

Andvari Associates commented on Copart, Inc. (NASDAQ:CPRT) in their Q4 2022 investor letter:

“Willis Johnson founded Copart, Inc. (NASDAQ:CPRT) as an auto salvage business in 1982 and the company is now the largest auctioneer of damaged and totaled vehicles in the world. It sells more than 3.5 million vehicles per year and operates more than 250 locations in 11 countries. It lists 250,000 vehicles for auction every day.

Copart’s primary customers are auto insurance companies. This would be the GEICOs, the Progressives, the State Farms, and many others around the world. When a policy holder’s car is damaged, the insurance company makes a determination of whether to repair the car or to consider it totaled and pay the owner the value of the car. The insurance company will total the car if repair costs outweigh the preaccident value of the car. If they total the car, the insurance company writes a check for the pre-accident value of the car and then uses Copart to auction the car to salvage any remaining value…” (Click here to read the full text)

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