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 Group 1 Automotive Inc. (NYSE:GPI) 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 line of new and used cars in a large auto dealership’s showroom.
Group 1 Automotive Inc. (NYSE:GPI)
Number of Hedge Fund Investors: 37
Group 1 Automotive Inc. (NYSE:GPI) is a leading automotive retailer that operates 260 dealerships and 338 franchises across the United States and the United Kingdom, offering a wide range of new and used vehicles from a wide variety of brands. The company generates revenue through various channels, including vehicle sales, financing arrangements, service contracts, and automotive maintenance and repair services. The company leverages its extensive dealership network and omni-channel platform to meet customer demands effectively.
The company faced significant challenges in the second quarter of 2024 due to the CDK outage that impacted its US operations from June 19 to June 26. Despite this disruption, Group 1 Automotive Inc. (NYSE:GPI) demonstrated resilience by continuing to serve customers through alternative processes.
In the second quarter of 2024, Group 1 Automotive Inc. (NYSE:GPI) reported impressive financial results, achieving an adjusted net income of $133.1 million and total revenues of $4.7 billion, marking a second-quarter record. The company experienced all-time high new vehicle revenues of $2 billion in the US, driven by a 7% increase in new vehicle sales units. Used vehicle sales also saw growth both sequentially and year-over-year, demonstrating strong demand despite slight declines in gross profit per unit.
Additionally, the company has recently expanded its UK operations with two significant acquisitions. On October 1, 2024, the company announced the purchase of Soper of Lincoln BMW/MINI, located north of London in the county of Lincolnshire. This investment is expected to generate around $125 million in annual revenues. Earlier, on July 1, 2024, Group 1 Automotive Inc. (NYSE:GPI) acquired four Mercedes-Benz dealerships in Hertfordshire, projected to bring in $105 million in annual revenues.
In the Q2 2024 earnings call, management announced that the company is looking forward to closing the Inchcape acquisition, which is expected to add $2.7 billion in revenue and effectively double its size in the UK. These strategic acquisitions enable the company to strengthen its brand portfolio and customer reach, positioning it well for continued growth and profitability.
As of the second quarter of 2024, Group 1 Automotive Inc. (NYSE:GPI) was held by 37 hedge funds, with total stakes amounting to $451.38 million, according to Insider Monkey’s database.
Overall GPI ranks 4th on our list of the best used car stocks to buy according to hedge funds. While we acknowledge the potential of GPI 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 GPI 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.