We recently compiled a list of the 10 Best Used Car Stocks To Buy According to Hedge Funds. In this article, we are going to take a look at where Carvana Co. (NYSE:CVNA) stands against the other car stocks.
Used Car Prices Decline: What Buyers Need to Know
The used car market plays a vital role in the automotive industry by providing affordable vehicle options. The market also supports economic growth by creating jobs in sales, financing, and maintenance while promoting sustainability through the reuse of vehicles. According to IMARC Group, the United States used car market size reached 36.1 million units in 2023. Looking forward, the market is expected to grow at a compound annual growth rate (CAGR) of 3.5% during 2024-2032 to reach 50.36 million units by the end of the forecasted period.
The used car market is experiencing notable changes as prices have continued to decline, creating a more favorable environment for buyers. In Q2 2024, the average price of used vehicles fell by 6.8% year-over-year, dropping from $29,382 to $27,319, according to data from Edmunds.
Despite this decline in used car values, the average time it takes to sell a used vehicle remains almost unchanged at around 35 days, indicating that while prices are lower, demand is still consistent. On the other hand, the average days to turn for new vehicles rose to 53 days in Q2 2024, up from 37 days in Q2 2023. This trend reflects broader dynamics in the automotive market, particularly as new car inventory levels rise.
This buildup of new cars has prompted dealers to offer discounts and incentives on older inventory, which in turn affects the values of newer used vehicles. As prices for used cars trend downward, consumers are presented with more affordable options, making it an advantageous time for buyers in the used car market.
Fed’s Rate Cut and the Car Market
The Federal Reserve recently cut U.S. short-term borrowing costs by half a percentage point, marking its first rate reduction in four years. The new key rate now stands at 4.75%-5.00%. This significant move aims to alleviate financial pressures on consumers amid concerns about a cooling labor market and high inflation, which the Fed has been combating for over two years.
The recent rate cut could eventually boost new vehicle sales. However, on September 30, CNBC reported that experts caution the effects on auto loan rates may not be immediate or substantial. Currently, auto loan rates remain high, with averages exceeding 9.61% for new cars and nearly 14% for used vehicles, according to Cox Automotive. Jonathan Smoke, chief economist at Cox Automotive, notes that although conditions are expected to improve compared to the previous year, affordability challenges will persist. He highlights that interest rates will still be more than two and a half percentage points higher than the average levels seen over the past 24 years.
While a half-percentage-point reduction is a positive step, analysts indicate that consumers might not see substantial changes in borrowing costs so soon. Smoke pointed out that auto loan rates are influenced by longer-term bond yields and the performance of loans. As a result, auto loan rate changes can be delayed.
With a clearer understanding of the dynamics in the US car market, let’s now turn our attention to the 10 best used car stocks to buy according to hedge funds.
Methodology
To compile our list of the 10 best used car stocks to buy according to hedge funds, we used the Finviz and Yahoo stock screeners to find the largest used car companies. We also reviewed various online resources for additional insights. From this initial pool of more than 20 used car stocks, we focused on the top 10 stocks most favored by institutional investors. The stocks are ranked in ascending order based on the number of hedge funds holding stakes in them as of Q2 2024.
At Insider Monkey we are obsessed with 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 customer buying a used car with the help of a finance specialist.
Carvana Co. (NYSE:CVNA)
Number of Hedge Fund Investors: 61
Carvana Co. (NYSE:CVNA) is a compelling investment opportunity in the used car market due to its innovative e-commerce platform and unique business model. As an online used car retailer, the company has transformed the traditional car buying experience in the US by allowing customers to browse, finance, and purchase vehicles entirely online, offering a selection of tens of thousands of cars. The company is famous for its unique “car vending machines”.
With services like home delivery and local pickup in over 300 US markets, Carvana offers an unparalleled level of convenience. The company’s customer-centric approach includes transparent pricing and detailed vehicle histories, along with a seven-day return policy that boosts customer confidence.
CVNA’s second quarter of 2024 was exceptional, showcasing the strength of its unique business model. The company saw a 33% increase in retail units sold and a 15% rise in revenue year-over-year. Carvana achieved record-breaking results, including positive net income and all-time highs in adjusted EBITDA and EBITDA margin. In Q2 2024, Adjusted EBITDA was $355 million, an increase of $200 million, while adjusted EBITDA margin was 10.4%, a 5.2 percentage point increase year-over-year.
Looking ahead, Carvana Co. (NYSE:CVNA) expects continued growth, projecting adjusted EBITDA of $1 billion to $1.2 billion for the full year 2024. This represents a significant increase from $339 million in 2023. The company is well-positioned for future expansion, with the physical capacity to handle approximately three times its current volume. Real estate from the acquisition of ADESA’s US physical auction business, consisting of 56 ADESA US locations totaling approximately 6.5 million square feet of buildings on more than 4,000 acres, could support vehicle reconditioning at a scale approximately eight times the company’s current run rate.
With plans for further improvements, combined with a vertically integrated supply chain that streamlines operations, Carvana Co. (NYSE:CVNA) has positioned itself well for growth in the expanding e-commerce automotive sector. As more consumers prefer online shopping, Carvana’s innovative strategies and strong market presence make it a promising investment opportunity.
According to Insider Monkey’s Q2 database of over 900 hedge funds, 61 hedge funds held stakes in Carvana Co. (NYSE:CVNA). As of June 30, CAS Investment Partners holds 6.53 million shares of the company, valued at $840.65 million, making it CVNA’s most prominent shareholder.
Overall CVNA ranks 1st on our list of the best used car stocks to buy according to hedge funds. While we acknowledge the potential of CVNA as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns, and doing so within a shorter time frame. If you are looking for an AI stock that is more promising than CVNA 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.
