In this article, we will look at the 7 Best Small Cap Automotive Stocks to Buy.
The International Automotive Industry
The automotive industry is one of the fastest-growing industries, especially with the recent surge in demand for Electric Vehicles (EVs) across the globe. According to a report published by Fintech Futures, the global automotive industry was valued at $4.4 trillion in 2024. The market is expected to grow at a compound annual growth rate of 5.66% to reach $6.7 trillion by 2032. The recent trend of EVs, autonomous vehicles, and innovative technology has revolutionized the automotive sector. The transformation is expected to boost auto revenues by nearly 30% during the projected period.
The international automotive industry market share has been changing drastically during the year. According to a CNBC report published on June 14, Chinese automakers have overtaken the US in terms of sales for the first time. Chinese automakers, led by BYD, sold 13.4 million new vehicles in 2023 surpassing 11.9 million vehicles sold by their US counterparts. On the other hand, the Japanese automotive industry stood undefeated by selling 23.59 million new vehicles during the same year. Moreover, China’s sales growth also outperformed that of the US. The country grew its automotive sales by 23% during the year as compared to a 9% growth by the US.
China has been focusing on growing its exports of the automotive industry to capture the international market. According to another CNBC report published on June 27 Chinese automakers are expected to achieve 33% of the global automotive market share by 2030. As of 2024, China has already captured 21% market share and sales of automobiles outside of China are expected to grow from 3 million this year to 9 million by 2030. Currently, around 59% of Chinese automotive sales come from within the country, with Russia being the largest market for Chinese automotive at 33%. If you want to read more about automotive industry trends you can look at the Top 18 Automotive Industry Innovations and Trends.
The US Automotive Industry Outlook
The United States is one of the key players in the international market. According to a report by Alliance for Automotive Innovation, the sales of new vehicles in the month of June dropped 3.4% year-over-year amounting to 1.32 million. The slow down in the sales is mainly attributed to higher prices and interest rates that hinder a stronger market. However, the full year sales estimates look better, with new vehicle sales expected to reach 16.1 million during the year, indicating a 12.4% increase from last year. On the other hand, on June 25 Reuters reported that uncertainty looms in the US automotive industry as the upcoming elections are expected to reshape the US economy. Cox Automotive reiterated its full year 2024 guidance at 15.7 million units.
The US consumer market has been reluctant to purchase vehicles due to inflation, and some shoppers are expected to keep holding back due to election uncertainty. As per Reuters, around 74% consumers and 81% dealers believe that inflation is the top concern and that the election is likely to influence it. This has led to a sell-off in auto stocks and many companies with strong fundamentals are now available at cheaper prices. With that, let’s now look at the 7 best small cap automotive stocks to buy.
A manufacturing facility floor filled with an array of automotive parts and accessories.
Our Methodology
To compile the list of best small cap automotive stocks to buy we used Yahoo Finance and Finviz stock screeners. We set the market cap range between $250 million to $2 billion to get small cap stocks only. We checked auto manufacturers, auto and truck dealerships, and also auto parts for this article. Once we had a consolidated list of small cap automotive stocks, we selected and ranked the stocks that were the most widely held by institutional investors, as of Q1 2024. The list is in ascending order of the number of hedge funds holders for each stock.
Why do we care about what hedge funds do? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
7. Standard Motor Products, Inc. (NYSE:SMP)
Number of Hedge Funds Holders: 10
Standard Motor Products, Inc. (NYSE:SMP) is a leading player in the automotive aftermarket and specializes in manufacturing and distribution of auto parts including fuel systems, ignitions, battery cables, air-conditioning, heating, and a wide range of future-oriented equipment. The company operates in three main segments namely, vehicle control, temperature control, and engineered solutions segment and sells its products to warehouses, retailers, and Original Equipment Manufacturers (OEM) in the United States and internationally.
What sets Standard Motor Products, Inc. (NYSE:SMP) apart from its competitors is its strong reputation in the industry stemming from its 100+ years of experience with well known brands such as Standard, BWD, and Four Seasons. Moreover the company’s portfolio of aftermarket automotive parts spans 80,000 products ranging from engine management products to engineered solutions for both automotive and other industrial applications. This vast array of products gives Standard Motor Products, Inc. (NYSE:SMP) a revenue diversification advantage.
The company posted a successful second quarter of 2024. Net sales (Revenue) for the quarter were recorded at $389.8 million, a 10.4% increase when compared to last year’s second quarter and 6% year-to-date increase relative to 2023. The company performed well across all segments and the temperature control segment posted record quarterly sales of $124.5 million, up 28.2% versus the same quarter last year. The company expects an even better next quarter as temperatures around the world remain hot.
The management of Standard Motor Products, Inc. (NYSE:SMP) is working towards increasing their profitability and cutting cost pressure. The management has launched an early retirement program during the quarter, which is expected to contribute $10 million in annualized savings. Moreover, the company also announced its agreement to acquire AX V Nissens III APS, a leading European manufacturer and distributor of aftermarket engine cooling products for around $388 million. Nissens has annual revenues of $260 million and a growing portfolio of vehicle control technologies. The acquisition will allow Standard Motor Products, Inc. (NYSE:SMP) to increase its market share in the European market.
Standard Motor Products (NYSE:SMP) is currently trading at 11 times this year’s earnings, at a 30% discount to its peers. SMP is cheap at current levels given that its trading at a lower multiple than its peers and earnings are expected to grow by 56.76% this year to $0.58.
6. Cars.com, Inc. (NYSE:CARS)
Number of Hedge Funds Holders: 15
Cars.com, Inc. (NYSE:CARS) is an audience driven technology company that simplifies the process of buying and selling cars. The company connects consumers with local dealers through its AI-driven car commerce platform and allows users to search, compare, and buy new and used cars. The comprehensive services provided by the platform include Dealer Inspire, AccuTrade, and Media Network services. The Dealer Inspire tool provides digital solutions including website creation, hosting services, and digital retailing to enable its dealer customers to manage their online reputation effectively. AccuTrade technology helps dealers price vehicles accurately and empowers retail profitability. Lastly, the Media Network technology helps dealers and automakers market their cars across various social media platforms. Top customers of the company include local dealers, Original Equipment Manufacturer (OEMs), and advertisers and lenders in the automotive industry of the United States.
The competitive edge of Cars.com, Inc. (NYSE:CARS) lies in its ability to attract high traffic to its platforms that allows dealers to access a large pool of ready to buy customers. The company attracts more than 25 million visitors monthly, which speaks for its brand recognition and strong online presence in the US market. Moreover, the amalgamation of innovative technologies resulting from strategic acquisition of companies like Accu-Trade and CreditIQ, puts Cars.com at a near-monopoly situation in the US automotive industry.
During the fiscal first quarter of 2024, the company grew its top-line by 8% year-over-year, on the back of strong performance across both business segments. The dealers revenue grew 8% year-over-year driven by continued growth in its dealer to consumer (D2C) platform. On the other hand, the OEM and national revenue was up by 13% versus the previous year. Growth in this segment was mainly due to increased OEM investments and increased consumer awareness. Looking at its historical analysis, Cars.com has been able to grow its bottom line by 30% during the last 5 years, indicating the company’s profitability and operational efficiency. Management has also been managing margins and free cash flow effectively. The adjusted EBITDA for the quarter amounted to $53 million, whereas the adjusted EBITDA margin was 29%. Improved EBITDA margins led Cars.com to increase its free cash flow by over $5 million year-over-year to $27 million.
Cars.com, Inc. (NYSE:CARS) is cheap at current levels. It is trading at 10 times this year’s earnings, a 19% discount to its peers. Moreover, its earnings are expected to grow by 100% this year to $0.14.
5. Holley Inc. (NYSE:HLLY)
Number of Hedge Funds Holders: 20
Holley, Inc. (NYSE:HLLY) is one of the best small cap automotive stocks. It is a leading designer, manufacturer and seller of high-performance aftermarket products for car and truck enthusiasts and sells its products in the United States, Europe, China, and Canada. The company generates revenue through 5 business segments including electronic systems, mechanical systems, exhausts, accessories, and safety equipment. Holly, Inc. (NYSE:HLLY) employs an omni-channel distribution strategy to sell its products including Direct to Consumer (DTC), warehouse distribution, e-tailers, traditional retailers, and installer channels. The competitive edge of Holley, Inc (NYSE:HLLY) lies in its robust portfolio of iconic brands including Holley, MSD, Simpson, Flowmaster and more than 50 others, that allows the company to operate in major automotive aftermarket segments ranging from domestic muscle enthusiasts to safety and racing products.
HLLY is an investor’s favorite stock; it was held by 20 hedge funds in Q1 2024 with total stakes worth $21.7 million. Leucadia National is the top shareholder in the company, as of Q1, and disclosed a stake worth $8.4 million. During the first quarter of 2024, Holley Inc. (NYSE:HLLY) demonstrated its ability to navigate profitability through tough market conditions. The company experienced a decline of 7.9% in its net sales, with revenue dropping to $158.6 million. The decline in sales was mainly due to weak consumer demand and an overall softening of consumer environment. However, regardless of a decline in net sales, Holley, Inc. (NYSE:HLLY) was able to maintain robust margins, with gross margins at 32.8% and adjusted gross margins at 38.9% during the quarter. In terms of earnings, the company posted an adjusted EBITDA of 19.3% and also grew its free cash flow by $15 million year-over-year. The growth in free cash flow was mainly due to management’s efforts to optimize inventory and working capital. Moreover, the company is also working towards stabilizing its debt position, it not only reduced its debt by $15 million during the quarter but also indicated its exit from the covenant relief period by the end of the second quarter.
Is Holley, Inc. (NYSE:HLLY) a profitable investment?
It’s true that the company faced some headwinds in terms of decline in sales during the previous quarter and an overall softening consumer demand. However, what’s noteworthy is the company’s ability to drive profitability during challenging market conditions. The company has grown its revenue and levered free cash flow by 5% and 20% during the past 5 years. Moreover, management has been working on improving its product line-up during the previous quarter and is ready to introduce innovative products across all business segments. The full-year outlook by management also remains positive with net sales between $640 million to $680 million and adjusted EBITDA between $125 million and $145 million.
HLLY is currently trading at 15 times its forward earnings, at a slight premium to its sector. However, it still presents an attractive entry point for value investors because its earnings are expected to grow by 100% this year to reach $0.06. Moreover, over $41 million in cash and cash equivalents on the balance sheet can be used for growth. Analysts hold a consensus Buy opinion on the stock and their average price target of $7 implies an upside of 95% from current levels.
4. OPENLANE Inc. (NYSE:KAR)
Number of Hedge Funds Holders: 25
OPENLANE Inc. (NYSE:KAR) operates as a digital marketplace for used vehicles, connecting dealers, rental companies and independent sellers to buyers across the United States, the Philippines, Europe, and Uruguay. The company runs its business through two main business segments, namely Marketplace and Finance. The marketplace segment offers an app based digital platform that allows dealers to buy and sell used vehicles. The platform includes various features including different sales formats, inspection services, transportation, and administrative services. On the other hand, the finance segment provides vehicle financing services such as the floorplan services (short-term, inventory-secured loan financing for independent used vehicle dealers). OPENLANE Inc. (NYSE:KAR) generates its revenue through charging fee per transaction on its marketplace platform and through interest and fee from its finance service to dealers.
What set’s OPENLANE Inc. (NYSE:KAR) apart from its competitors is its ability to facilitate large volumes of vehicle transactions. In 2023 alone the OPENLANE platform was used to transact more than 1.3 million used vehicles, amounting to approximately $24 billion in sales. The company posted a successful first quarter of 2024 and grew its revenue by 4% year-over-year during the quarter, mainly due to a 13% increase in unit volume sales through its marketplace segment. The increase in marketplace volumes also contributed to the profitability of the company and delivered approximately $35 million in adjusted EBITDA. Although the financial segment of OPENLANE Inc. (NYSE:KAR) witnessed a 2% decrease in net revenue, due to higher net credit losses and low interest rate, it was still able to generate $40 million in adjusted EBITDA. As a result, the consolidated adjusted EBITDA of the company for the first quarter reached $75 million and the company was able to generate $100 million in cash flow from operations.
KAR isn’t too expensive at current levels. It’s trading at 22 times its forward earnings, a 15% discount to its 5 year average. Analysts expect earnings to grow by 22% during the year to reach $0.22. Wall Street is also bullish on KAR, with 7 analysts having a consensus Buy opinion. The average price target of $19.50 implies an 11.62% upside from current levels.
KAR was held by 25 hedge funds in Q1 2024, with total stakes worth $309.9 million. Of those Hawk Ridge Management was the largest investor and held a position worth $76.2 million.
3. Blue Bird Corporation (NASDAQ:BLBD)
Number of Hedge Funds Holders: 27
Blue Bird Corporation (NASDAQ:BLBD) is another best small cap automotive stock to buy. The company has a market capitalization of $1.504 billion as of August 4, 2024.
Blue Bird Corporation (NASDAQ:BLBD) is a leading manufacturer of school buses in the United States and operates by designing, manufacturing, and selling type C, type D, and speciality school buses. Apart from the traditional diesel engine buses, the company also provides alternative fueling options such as electric power, propane, gasoline, and compressed natural gas engines. Blue Bird Corporation (NASDAQ:BLBD) also operates in replacement parts for its vehicles and provides bus finance and extended warranties services. The company serves a network of dealers, fleet operators, government agencies, and independent service centers.
The company posted a record-breaking second quarter of 2024. Blue Bird Corporation (NASDAQ:BLBD) grew its net sales by 15% to a record-high $346 million during the quarter. The increase in revenue was on the back of 2,254 buses sold during the quarter, which was slightly down versus the last year, but 6% above Q1 sales. The company was able to achieve record revenue despite lower bus volume sold as compared to last year due to higher bus pricing. The increase in bus prices also resulted in the company generating $46 million in adjusted EBITDA almost double versus last year and well above the guidance range of $25 million to $35 million. Blue Bird Corporation has been doing well in keeping up its order backlog despite the price hike, which demonstrates strong market demand for its buses. The firm order backlog was worth $850 million at the end of Q2 reflecting 5,900 buses in the order backlog, almost 30% higher than the previous quarter.
The competitive edge of the company lies in its ability to provide alternative fueling options, especially the electric power buses. During the second quarter the electric bus deliveries for the company reached an all time high and accounted for 9% of total units sold. The company has raised its full year guidance and expects revenue of $1.3 billion and an adjusted EBITDA of $145 million to $165 million.
The company has significant room for growth as it has $79 million in cash and cash equivalents and grew its free cash flow by $30 million year-over-year. This strong financial position puts the company at a sweet spot to capitalize on the growing demand of school buses.
BLBD provides an attractive entry point for investors as it is trading at 17 times its forward earnings, an 8% discount to its sector, and has a history of growing its top line and bottom line. The company has grown its revenue by 4.5% and net income by 18% during the past 5 years. 7 Analysts hold a Strong Buy rating on the stock and their average price target of $60 represents an upside of 28.81% from current levels.
BLBD was held by 27 hedge funds during the Q1 of 2024, with total stakes worth $215.8 million. Of those, 325 Capital was the dominant shareholder in the company and held a stake worth $44.6 million.
2. Garrett Motion Inc. (NASDAQ:GTX)
Number of Hedge Funds Holders: 35
Garrett Motion, Inc. (NASDAQ:GTX) ranks as the second best small cap automotive stock to buy. The company together with its subsidiaries engages in designing, manufacturing and selling of cutting edge technologies for emission reduction and energy efficient solutions for automotive and industrial space companies. The key product line of Garrett Motion, Inc (NASDAQ:GTX) include turbochargers, air and fluid compression technologies, and high speed electric motors for Original Equipment Manufacturing (OEMs) and distributors worldwide. The company has a special focus on zero emission technologies using hydrogen fuel cell systems and also develops key E-Powertrain and E-Cooling compressor products to support the global electrification trend.
The company delivered mixed results for Q2, 2024. It faced some headwinds due to softer global industry trends across both light and commercial vehicle markets. Moreover, issues such as the regional dynamics between China and Europe and commodity deflation impacted the net sales of the company. Net sales of Garrett Motion, Inc. (NASDAQ:GTX) were down 7% year-over-year during the quarter and amounted to $3.57 billion. However, the aftermarket segment of the business witnessed a 7% increase during the same time, indicating strong market demand for its products. Despite market challenges, Garrett Motion, Inc. (NASDAQ:GTX) was able to maintain profitability and achieved an adjusted EBITDA margin of 16.9%, reflecting a 40 basis point increase from the previous quarter. In addition, the company performed well on the financial front by generating $62 million in adjusted free cash flow during the quarter and also reduced its debt by $394 million year-over-year.
A key driver of the company’s potential lies in its research capabilities. Garrett Motion, Inc. (NASDAQ:GTX) made significant strides in zero emission technologies by securing its first series of production contracts for its fuel cell application. This technology along with its E-Powertrain and E-Cooling technologies align perfectly with the market trend of sustainability and regulatory pressures for lower emissions, giving the company a strong competitive edge over its peers. Moreover, the company has demonstrated its ability to make cash and drive profitability by growing its revenue by 2.87% and levered free cash flow by 31% during the past 5 years. It ended the second quarter with a strong balance sheet, with approximately $300 million in cash and cash equivalents.
GTX is trading at 7 times its forward earnings, a 54% discount to its sector. Moreover, its earnings are expected to grow 45% during the year to reach $0.32. Wall Street is also bullish on the stock and 2 analysts have a Strong Buy rating. The average price target of $12.50 implies an upside of 50.60% from current levels.
GTX was held by 35 hedge funds in Q1 2024, with total stakes worth $1.5 billion. Of those, Howard Marks’ Oaktree Capital Management was the top investor in the company and disclosed a position worth $438 million.
1. PHINIA Inc. (NYSE:PHIN)
Number of Hedge Fund Holders: 37
PHINIA, Inc. (NYSE:PHIN) is a new company that came into being as a spin off from BorgWarner’s Fuel Systems and Aftermarket segments in 2023. The company has three main business segments namely Fuel Systems, Aftermarket, and Innovation. The Fuel Systems segment engages in designing and manufacturing of integrated components such as pumps, fuel injection systems, and engine control modules. These technologies increase efficiency and reduce emissions in vehicles. The Aftermarket segment of the company manufactures and sells products including starters and alternators. Lastly, the Innovation segment involves research and development of alternative fuel technologies and advanced engineering for a carbon free automotive industry. PHINIA, Inc. (NYSE:PHIN) sells its products to OEMs in the automotive industry and for other industrial applications.
The competitive edge of the company originates from over 100 years experience of BorgWarner in developing internal combustion engine products and its strong brand recognition. The company posted a profitable second quarter since its inception as a stand alone entity despite slower market conditions which affected its adjusted sales. PHINIA, Inc. (NYSE:PHIN) generated $863 million in adjusted sales slightly lower than the previous quarter due to soft market conditions. However, regardless of a slight decrease in sales, it maintained its profit margins and generated $117 million in adjusted EBITDA, with margins at 13.6% during the quarter. Margins were relatively strong for its Aftermarket and Fuel Systems segments, at 15.1% and 10.%, respectively, with the Fuel System segment benefiting from retroactive customer recoveries.
The company has done well to maintain a strong balance sheet during its transition period from its parent company to a stand alone entity. It has exited all transition service agreements and contract manufacturing agreements and is now completely independent. Despite the transition, the company ended the quarter with $339 million in cash on the balance sheet and generated an adjusted free cash flow of $108 million during the quarter, that too after returning $180 million to shareholders through dividends and share purchases.
Is PHINIA, Inc. (NYSE:PHIN) a good investment?
It’s too soon to say anything. However, the company has demonstrated its ability to generate solid margins amidst soft market conditions and management plans to leverage its brand and capabilities to drive long-term growth. Moreover, the company is also investing in hydrogen and alternative fuel products, which is in-line with the market trend. This along with a strong balance sheet as an independent company offers room for growth. The company presents an attractive entry point for investors as it is trading at 11 times its forward earnings, which is a 26% discount to its sector. Wall Street is also bullish on PHIN and 2 analysts hold a Strong Buy rating on the stock. The average price target of $52.5 represents an upside of 23.59% from current levels.
Overall, PHIN was held by 37 hedge funds that disclosed positions worth $200 million, at the close of Q1 2024.
While we acknowledge the potential of PHINIA, Inc. (NYSE:PHIN) to grow, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than NVIDIA but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
Read Next: Analyst Sees a New $25 Billion “Opportunity” for NVIDIA and Jim Cramer is Recommending These 10 Stocks in June.
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