5 Most Undervalued Auto Stocks According To Hedge Funds

In this article, we discuss 5 most undervalued auto stocks according to hedge funds. If you want to see more stocks in this selection, check out 11 Most Undervalued Auto Stocks According To Hedge Funds. 

5. AutoNation, Inc. (NYSE:AN)

Number of Hedge Fund Holders: 33

P/E Ratio as of January 19: 4.52

AutoNation, Inc. (NYSE:AN) is a Florida-based automotive retailer that operates through three segments – Domestic, Import, and Premium Luxury. On December 12, AutoNation, Inc. (NYSE:AN) announced its acquisition of RepairSmith, a mobile automotive repair and maintenance company. The acquisition will allow AutoNation to become an all-inclusive transportation solutions company rather than simply an auto dealer. It is one of the most undervalued auto stocks according to elite investors. 

On January 17, Morgan Stanley analyst Adam Jonas downgraded AutoNation, Inc. (NYSE:AN) to Underweight from Equal Weight and trimmed the price target to $96 from $104. The analyst lowered franchise dealer forecasts and downgraded AutoNation, Inc. (NYSE:AN) after “bellwether” CarMax, Inc. (NYSE:KMX)’s disappointing results. Declining used car prices and growing interest rates may take affordability to a “tipping point,” increasing downside to selling prices and units, the analyst told investors in a research note. He is looking for better entry points in the auto space.

According to Insider Monkey’s Q3 data, 33 hedge funds were long AutoNation, Inc. (NYSE:AN), compared to 31 funds in the last quarter. Cliff Asness’ AQR Capital Management is the leading position holder in the company, with 1.03 million shares worth $105.5 million. 

Here is what Black Bear Value Partners has to say about 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. Asbury Automotive Group, Inc. (NYSE:ABG)

Number of Hedge Fund Holders: 34

P/E Ratio as of January 19: 5.25

Asbury Automotive Group, Inc. (NYSE:ABG) is a Georgia-based automotive retailer that deals in new and used vehicles, vehicle repair and maintenance services, replacement parts, and collision repair services. Asbury Automotive Group, Inc. (NYSE:ABG) is one of the most undervalued stocks in the auto sector according to hedge funds. 

On October 6, JPMorgan analyst Rajat Gupta maintained a Neutral rating on Asbury Automotive Group, Inc. (NYSE:ABG) and lowered the firm’s price target on the shares to $185 from $205. The analyst noted the setup for franchise auto dealers into Q3 earnings is the most negative he has encountered since the pandemic, and he cut back estimates for 2023 “materially” to reflect a mild recession and expects a new normal by 2025.

According to Insider Monkey’s data, 34 hedge funds were long Asbury Automotive Group, Inc. (NYSE:ABG) at the end of Q3 2022, compared to 27 funds in the prior quarter. Lauren Taylor Wolfe’s Impactive Capital is the largest stakeholder of the company, with 2.20 million shares worth $332.85 million. 

Bonhoeffer Capital Management made the following comment about Asbury Automotive Group, Inc. (NYSE:ABG) in its Q3 2022 investor letter:

“One of our holdings in the distribution theme is Asbury Automotive Group, Inc. (NYSE:ABG), an automobile dealership firm. Asbury’s growth model is through same-store sales growth (4% per year), internet distribution (10% per year), and synergistic M&A (5% per year). These are enhanced by opportunistic operational leverage from scale and share repurchases (5% annual growth). Over the past 10 years, Asbury’s net income margins are up 120% with a 5x increase in revenues. These factors should lead to about a 20% EPS growth going forward. Ashtead has had 19% and 31% EPS growth over the past five and 10 years, respectively.

As can be seen below, a large portion of future growth is based upon the growth of internet sales. Both Asbury and Lithia have internet strategies which capture a younger demographic who do not visit dealerships with the same frequency as older folks. Asbury, through its online platform Clicklane, has found internet purchasers have very little overlap with existing customers; 95% are new customers. Asbury’s strategy is to target customers who are within 20 miles of an existing Asbury location vs. online-only competitors (like Carvana) and Lithia. Asbury has had a per-store growth rate of 67% over the last year and only sells cars online in about 60% of its current footprint. This growth rate will decline going forward as the markets mature, but it will be bolstered as Clicklane is rolled out to the remaining 40% of Asbury’s footprint…” (Click here to read the full text)

3. Lithia Motors, Inc. (NYSE:LAD)

Number of Hedge Fund Holders: 45

P/E Ratio as of January 19: 5.06

Lithia Motors, Inc. (NYSE:LAD) was founded in 1946 and is headquartered in Medford, Oregon. It is an automotive retailer in the United States that operates through three segments – Domestic, Import, and Luxury. On December 6, Lithia Motors, Inc. (NYSE:LAD) announced that it has expanded into Colorado with purchase of its first Ferrari store. The acquisition is expected to generate $75 million in annualized revenue, bringing Lithia Motors, Inc. (NYSE:LAD)’s total expected annualized revenue in 2022 to more than $3.3 billion. Acquisitions are a primary part of the company’s 2025 Plan to achieve $50 billion in revenue and $55 to $60 in earnings per share.

On January 13, Wells Fargo analyst Colin Langan downgraded Lithia Motors, Inc. (NYSE:LAD) to Equal Weight from Overweight with a price target of $233, up from $212. The analyst expects gross margins to begin to fall back to their long-term averages from current record highs, and is highly concerned that gross margins will also normalize in both used and F&I segments, which also are at peak highs. 

According to Insider Monkey’s data, 45 hedge funds were bullish on Lithia Motors, Inc. (NYSE:LAD) at the end of Q3 2022, compared to 40 funds in the earlier quarter. David Abrams’ Abrams Capital Management is the largest stakeholder of the company, with 2.35 million shares worth $504.4 million. 

Here is what Oakmark Select Fund has to say about Lithia Motors, Inc. (NYSE:LAD) in its Q1 2022 investor letter: 

“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.”

2. Ford Motor Company (NYSE:F)

Number of Hedge Fund Holders: 47

P/E Ratio as of January 19: 5.40

Ford Motor Company (NYSE:F) is a Michigan-based company that designs, manufactures, and services Ford trucks, cars, sport utility vehicles, electrified vehicles, and Lincoln luxury vehicles worldwide. It operates through three segments – Automotive, Mobility, and Ford Credit. Ford Motor Company (NYSE:F) is one of the most undervalued stocks to invest in. On January 5, the company reported gains in EV market share and strong truck sales. According to a company data release, Ford sold 179,279 vehicles in December 2022, up from 173,740 in December 2021.

On November 30, Citi analyst Itay Michaeli raised the price target on Ford Motor Company (NYSE:F) to $14 from $13 and maintained a Neutral rating on the shares. The analyst updated his model to reflect the Q3 results and recent data points. The new target represents slightly higher multiples reflecting Ford Motor Company (NYSE:F)’s improved auto free cash flow conversion this year, the analyst wrote in a research note. However, the analyst would like to see a more attractive entry point in the shares.

According to Insider Monkey’s data, 47 hedge funds were long Ford Motor Company (NYSE:F) at the end of September 2022, compared to 46 funds in the prior quarter. Ken Fisher’s Fisher Asset Management is the largest stakeholder of the company, with nearly 45 million shares worth $503.6 million. 

Here is what Baron Fund has to say about Ford Motor Company (NYSE:F) in its Q1 2022 investor letter:

“Ford (NYSE:F) is another example of typical industrial manufacturing business executive mindsets. The April 18, 2022, Bloomberg Businessweek cover story features Ford CEO Jim Farley behind the wheel of an electrified Ford F-150 Lightning. The article is titled, “Hey Elon, THIS is a truck.” I thought the article was terrific. One idea especially stood out to me. Since the F-150 is such a popular vehicle, it “argued for a gradual approach to electrification. Essentially the company retrofitted an existing F-150 with an electric powertrain rather than develop an entirely new truck.” No all-in financial and operation bet by this company on electrification.”

1. General Motors Company (NYSE:GM)

Number of Hedge Fund Holders: 74

P/E Ratio as of January 19: 6.01

General Motors Company (NYSE:GM) is a Michigan-based company that designs, manufactures, and sells trucks, crossovers, cars, automobile parts, and accessories in North America, the Asia Pacific, the Middle East, Africa, South America, the United States, and China. General Motors Company (NYSE:GM) is one of the most undervalued auto stocks according to smart investors. The company announced that it delivered 2.2 million vehicles in the United States in 2022, surpassing Toyota Motor Corporation. Heading into 2023, the automaker expects EV sales to rise meaningfully and promote continued growth.

On January 19, Deutsche Bank analyst Emmanuel Rosner maintained a Hold rating on General Motors Company (NYSE:GM) but lowered the firm’s price target on the shares to $33 from $35. The analyst expects a mixed Q4 earnings and 2023 guidance season for U.S. autos, with multiple companies potentially falling short of quarterly consensus estimates, and most of them likely to issue cautious 2023 guidance amid volatile industry conditions and macro uncertainty.

According to Insider Monkey’s data, 74 hedge funds were long General Motors Company (NYSE:GM) at the end of the third quarter of 2022, compared to 75 funds in the prior quarter. Warren Buffett’s Berkshire Hathaway is the largest position holder in the company, with 50 million shares worth $1.60 billion. 

Here is what Diamond Hill Capital had to say about General Motors Company (NYSE:GM) in its Q3 2022 investor letter:

“Most recently, we initiated a position in General Motors Company (NYSE:GM), one of the largest automakers in the United States. Over the past several years, GM has taken steps necessary to focus the company on the most profitable segments and move into position to compete in an electrified and autonomous world. With the recent rise in interest rates there was a meaningful selloff in the auto industry, which presented us with an attractive entry point to a name we know well.”

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