Hedge Funds Are Overweight Car Dealership Stocks

A large number of public companies listed on US exchanges do business all over the world, getting a large chunk of their revenues from non-US markets. While this diversification helps them to balance out their top-line when the US economy is experiencing a turmoil, it also backfires at times, especially when the greenback is strong. That’s because their financial reporting is denominated in the US dollar and in spite of sound hedging practices, the volatility in the Forex markets can sometimes severely impact their numbers. For investors who don’t want their investments to be at the mercy of the Forex markets, stocks in the car dealership space represent one of the best opportunities that are available on the market today. However, that’s not the only reason to invest in stocks related to car dealership industry currently. With the auto industry in its best shape in decades, interest rates projected to be hiked at a nominal pace and the consistent growth in the labor market, most analysts and industry experts have a very favorable outlook on such stocks at this point in time. Considering that, in this post, we will take a look at five stocks related to the car dealership industry which the hedge funds covered by us were collectively most bullish while heading into the second quarter.

Our backtests that covered the period between 1999 and 2012, showed that following the 15 most popular small-caps among hedge funds can help a retail investor beat the market by an average of 95 basis points per month (see more details here).

Photographee.eu/Shutterstock.com

#5 Murphy USA Inc (NYSE:MUSA)

 – Investors with long positions (as of March 31): 21

– Aggregate value of investors’ holdings (as of March 31): $213.30 million

The number of hedge funds covered by us long Murphy USA Inc (NYSE:MUSA) inched up by two and the aggregate value of their holdings increased by $22.8 million during the first quarter. Funds that reduced their stake in the Arizona-based company during that period included Cliff Asness‘s AQR Capital Management, which brought down its holding by 7% to 934,481 shares, but still remained the largest shareholder of Murphy USA Inc (NYSE:MUSA) among funds covered by us, at the end of March. Shares of the retail motor fuel products marketer suffered a 20% drop in the period between April and August last year. However, they have recouped nearly all of those losses since then and are currently trading up 13% for 2016. On June 9, analysts at Jefferies Group reiterated their ‘Buy’ rating on the stock while boosting their price target to $82 from $76, which represents a potential upside of over 17% from the stock’s last trading price.

#4 CST Brands Inc (NYSE:CST)

 – Investors with long positions (as of March 31): 28

– Aggregate value of investors’ holdings (as of March 31): $725.11 million

CST Brands Inc (NYSE:CST)’s stock saw a large spike earlier this month after Reuters reported that Japan’s Seven & I Holdings and Canada’s Alimentation Couche-Tard have submitted indicative offers to acquire the company. Owing largely to that spike, shares of the convenience store retailer are currently trading up by almost 10% year-to-date.  During the first quarter, the ownership of CST Brands Inc (NYSE:CST) among hedge funds covered by us rose by five and the aggregate value of their holdings in it increased by $28.1 million. Notable investors that upped their stake in the company in that period included billionaire Mario Gabelli‘s GAMCO Investors, which boosted its holding by 18% to almost 2 million shares. According to M&A news website CTFN, CST Brands is currently reviewing the offers it has received and might go ahead with a deal if a buyer offers $50 per share or more.

#3 Lithia Motors Inc (NYSE:LAD)

 – Investors with long positions (as of March 31): 29

– Aggregate value of investors’ holdings (as of March 31): $452.44 million

Moving on, the number of hedge funds tracked by us with long positions in Lithia Motors Inc (NYSE:LAD) increased by four during the first quarter. However, the aggregate value of their holdings shrunk by 23.5% during the same period. Some of this decline in the value of holdings can be attributed to the 18% fall that Lithia Motors Inc (NYSE:LAD)’s stock suffered during the first quarter. Since reaching their lifetime high of $126.56 last year in November, shares of the automotive franchise operator have been on a downward journey, losing over 30% of their value so far in 2016. Nevertheless, most analysts feel that this decline in the stock is overdone and has made it considerably cheap at current levels. For its fiscal 2016 first quarter, analysts expect the company to report EPS of $1.94 on revenue of $2.18 billion, compared to EPS of $1.86 on revenue of $2.00 billion it delivered in the same quarter last year.  Amy Minella‘s Cardinal Capital increased its stake in Lithia Motors Inc by 11% to 168,879 shares during the first quarter.

#2 AutoNation, Inc. (NYSE:AN)

 – Investors with long positions (as of March 31): 32

– Aggregate value of investors’ holdings (as of March 31): $1.11 billion

AutoNation, Inc. (NYSE:AN) saw a notable decrease in its popularity among hedge funds during the first quarter, with its ownership among funds covered by us coming down by four and the aggregate value of their holdings in it falling by $278 million. Funds that sold their entire stake in the company during that period included billionaire Jim Simons‘ Renaissance Technologies. AutoNation, Inc. (NYSE:AN) lost more than one-fourth of its market capitalization amid a slump in the broader market in January and hasn’t been able to recover from that decline, so far as it trades with a year-to-date loss of 21%. Most analysts who cover the stock also don’t expect it to rebound anytime soon. The stock currently sports an average rating of ‘Hold’ and an average price target of $56.30 from the 16 prominent analysts and research firms on the Street who cover it.

#1 KAR Auction Services Inc (NYSE:KAR)

 – Investors with long positions (as of March 31): 36

– Aggregate value of investors’ holdings (as of March 31): $1.15 billion

Though KAR Auction Services Inc (NYSE:KAR)’s stock has performed well in the second quarter and is trading close to its lifetime high currently, it seems a lot of hedge funds were not expecting this as the number of hedge funds tracked by us long the stock fell by six and the aggregate value of their holdings in it fell by $65 million during the first quarter. Nevertheless, there were also a few hedge funds that became bullish on the stock during that period and initiated a stake in it, including Jacob Gottlieb’s Visium Asset Management, which purchased 252,849 shares. Despite trading very close to its lifetime high, KAR Auction Services Inc (NYSE:KAR)’s stock sports a respectable annual dividend of 2.84% currently. For its fiscal 2016 first quarter, the company reported EPS of $0.55 on revenue of $745 million, soundly beating analysts’ estimates of EPS of $0.50 on revenue of $695.79 million.

Disclosure: None