We recently compiled a list of the 10 Best Car Repair Stocks to Buy Now. In this article, we are going to take a look at where CarMax, Inc. (NYSE:KMX) stands against the other car repair stocks.
Price Wars in the Automotive Space
Every consumer in the market today has numerous options when it comes to cars. With the rise of electric and hybrid vehicles, this variety has only grown exponentially, resulting in many automotive sector players feeling the need to compete with each other on pricing alongside other things. Price competition has always been an indicator of a healthy market environment, as it offers the everyday consumer the ability to make an informed decision about the product that they want to buy, so this may not necessarily be a bad development. However, considering the fact that the automotive sector has been facing headwinds in the form of lower demand, particularly in light of higher inflation over the past couple of years, this additional burden of having to compete on pricing to attract more customers can result in many automotive providers facing losses.
According to Bill Russo, the founder and CEO of Automobility Limited, the price wars have penetrated the EV space with great zeal, particularly because EVs are among the priciest vehicles in the market today. Russo has stated that the weakness in demand for vehicles that we’re seeing so far in 2024 has the potential to plague the industry going forward and will continue to put pressure on pricing. With this backdrop, many investors may be wondering where to go with their money if they want to invest in the automotive space. The answer to that question is quite simple – automotive repair.
Where to Invest in the Automotive Space?
As new cars become too expensive to consider buying, your typical consumer is likely to head toward used cars, which typically require more repair and maintenance than a brand-new vehicle. Because of this trend, automotive companies that are dabbling in dealing with and repairing used vehicles may be poised to become new automotive stock investor favorites. According to Carvana CEO Ernie Garcia’s interview on CNBC’s “Power Lunch” this June, the used car market is reasonably stable this year, and used car prices are also down at present, which can be an added incentive for consumers to gravitate towards used vehicles.
Another exciting space within automotive is China, which has been rapidly growing its presence within the automotive industry with cheaper and more efficient vehicles. Going back to our discussion on price wars, we see that Chinese automakers are actually doing surprisingly well in providing low-cost EVs especially, which has led to experts such as Michael Dunne, founder and CEO of Dunne Insights, dubbing China the “world’s center of automotive manufacturing,” in an August interview with CNBC’s “Squawk Box Asia.” Dunne noted that China can produce cars more cheaply than anyone else in the world and that it has built more EVs than every other player, which has enabled it to export cars to more than 100 markets worldwide.
Considering this rapid growth, investors looking to pick up some automotive players could do well by considering companies that have longstanding partnerships with Chinese manufacturers, or by directly picking up Chinese car makers for their portfolio. The list we’ve compiled below has several companies that fit the first of these descriptions, alongside several other automotive players in the repair space.
Our Methodology
We used a stock screener to identify stocks in the automotive parts and repair businesses. We then shortlisted the stocks based on the number of hedge funds holding stakes in them, from the lowest to the highest number, by using Insider Monkey’s hedge fund data for the second quarter.
Why are we interested in the stocks that hedge funds pile into? 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).
A happy customer inspecting a newly purchased used car with the help of a sales assistant.
CarMax, Inc. (NYSE:KMX)
Number of Hedge Fund Holders: 35
CarMax, Inc. (NYSE:KMX) retails used vehicles and offers reconditioning and vehicle repair services to its customers. It is based in Richmond, Virginia.
While the automotive industry, in general, has been facing significant headwinds in light of higher inflation, CarMax, Inc. (NYSE:KMX) has managed to stay strong and continues to be a large, well-known, and profitable business. In the fiscal first quarter of 2025, the company benefited from positive trends in pricing and vehicle value stability. It also expanded its vehicle sourcing capabilities by attracting more dealers to its MaxOffer program through product enhancements that make the program easier to use.
Another factor that sets CarMax, Inc. (NYSE:KMX) apart from its competitors in the market is that its financial and operational performance remained largely unaffected by the CDK outage since it doesn’t use CDK as its Dealership Management System. Resultantly, the company managed to avoid much of the negative impact of the outage and came out on top relative to its competitors that did use the CDK system. CarMax, Inc.’s (NYSE:KMX) improved competitive advantage and omnichannel approach have thus aided in the company’s growth and popularity among investors.
In total, 35 hedge funds were long CarMax, Inc. (NYSE:KMX) in the second quarter, with a total stake value of $1.1 billion.
Vulcan Value Partners mentioned CarMax, Inc. (NYSE:KMX) in its second-quarter 2024 investor letter:
CarMax, Inc. (NYSE:KMX) is the largest used car retailer in the United States. The company has the third largest wholesale business in the U.S. and a large captive finance business. We believe that CarMax’s omnichannel approach is a competitive advantage that will enable the company to continue taking market share in a highly fragmented market. This strategy enables the company to generate higher and more stable levels of profit per used vehicle sold and generate solid returns on capital. A significant portion of the used car market is made up of small independent dealerships without resources to invest in digital infrastructure. Another significant portion of the market is made up of digital-only retailers, who are now focused on profitability at the expense of volume. CarMax continues to invest in its digital infrastructure which has improved its customer experience. These investments have made it easier to buy, sell and finance vehicles. Over the last two years, management has focused on de-leveraging the company’s balance sheet and right sizing the firm, which has significantly de-risked the business and positioned CarMax well for when volumes normalize. We believe that the combination of a leaner cost structure and an improved competitive position will strengthen the company’s prospects.
Overall KMX ranks 7th on our list of the best car repair stocks to buy. While we acknowledge the potential of KMX as an investment, we believe that AI stocks hold promise for delivering high returns and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than KMX but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.
