Right Tail Capital, an investment management company, released its first quarter 2023 investor letter, a copy of the same can be downloaded here. Today, Right Tail does not own any dealerships among its limited roster of investments. The sausage is in the test kitchen, but the recipe is still being optimized. According to the fund, they take investing your wealth seriously and only want to invest when they feel it’s one of their best 10-12 ideas. The longer-term questions around the business model are their primary concerns. This research is beneficial and will stay in the Right Tail library. In fact, the majority of Right Tail’s current investments were not made immediately following the initial work. Rather, Right Tail invested later either due to uncovering additional insights about the businesses or a more attractive price. Spare some time to check the fund’s top 5 holdings to have a clue about their top bets for 2023.
In its Q1 2023 investor letter, Right Tail Capital mentioned Asbury Automotive Group, Inc. (NYSE:ABG) and explained its insights for the company. Founded in 1995, Asbury Automotive Group, Inc. (NYSE:ABG) is a Duluth, Georgia-based car dealership company with a $4.4 billion market capitalization. Asbury Automotive Group, Inc. (NYSE:ABG) delivered a 15.09% return since the beginning of the year, while its 12-month returns are up by 30.14%. The stock closed at $206.30 per share on April 19, 2023.
Here is what Right Tail Capital has to say about Asbury Automotive Group, Inc. (NYSE:ABG) in its Q1 2023 investor letter:
“Several positives have surfaced. I’ve developed a better understanding for why the publicly traded dealerships have been good investments over time. For example, Asbury Automotive Group (NYSE:ABG) and Lithia Motors (LAD) are up nearly 20x in the last 20 years. As Warren Buffett describes, the businesses require little capital. He says, “You have no receivables to speak of. You floor plan your inventory. You can lease your real estate…so you can have very little capital actually invested in the business…you can work on fairly narrow margins and still earn a high return on capital.” Not surprisingly, Berkshire Hathaway bought one of the largest privately owned dealerships in 2015. The industry has consolidated as total dealerships have shrunk from ~30K to ~17K. It seems reasonable to me that the larger, better run organizations have an opportunity to continue to take share.
A car dealership’s profit stream also resembles sausage making with several components combining to support a better finished product. Gross profits from selling new and used cars are usually 25-35% of the total company mix. Higher margin items like parts and service and finance and insurance make up the remainder. The largest chunk, parts and services, tends to be the least cyclical and franchise
dealerships seem well-positioned to grow this business in the years to come. Similar to sausage becoming a value-added product from several ingredients, these individual revenue streams combine to
add value to the overall car dealership while providing several services that consumers want.”
LifetimeStock/Shutterstock.com
Our calculations show that Asbury Automotive Group, Inc. (NYSE:ABG) fell short and didn’t make it on our list of the 30 Most Popular Stocks Among Hedge Funds. Asbury Automotive Group, Inc. (NYSE:ABG) was in 26 hedge fund portfolios at the end of the third quarter of 2022, compared to 34 funds in the previous quarter. Asbury Automotive Group, Inc. (NYSE:ABG) delivered a 12.10% return in the past 3 months.
In March 2023, we also shared another hedge fund’s views on Asbury Automotive Group, Inc. (NYSE:ABG) in another article. You can find other investor letters from hedge funds and prominent investors on our hedge fund investor letters Q1 2023 page.
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Disclosure: None. This article is originally published at Insider Monkey.
