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 Lithia Motors Inc. (NYSE:LAD) 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 in a store, examining a new vehicle on the showroom floor.
Lithia Motors Inc. (NYSE:LAD)
Number of Hedge Fund Investors: 35
Lithia Motors Inc. (NYSE:LAD) is a leading automotive dealership group in the US. It operates 299 locations across the US, 15 locations in Canada, and 155 locations in the UK. The company offers a wide range of products and services throughout the vehicle ownership lifecycle, including new and used vehicle sales, financing solutions, and efficient auto repair services. The company provides simple, transparent, and convenient experiences through both physical dealerships and e-commerce platforms.
Despite challenges from the CDK outage, the company has shown strong performance in Q2 2024, with revenues reaching $9.2 billion, a 14% increase year-over-year. Lithia Motors Inc. (NYSE:LAD) also reported profitability in its financing operations, which turned around from a loss of $18.7 million in Q2 2023 to an income of $7.2 million in Q2 2024.
Lithia Motors Inc. (NYSE:LAD) continues to strengthen its business through strategic acquisitions, which have become a core competency for the company. During the second quarter, Lithia welcomed two stores from the Sunrise Group in Tennessee and a Woodbridge Hyundai store in Toronto. On September 10, Lithia Motors Inc. (NYSE:LAD) announced the acquisition of three dealerships from Duval Motor Company in Florida, projected to generate over $200 million in annual revenue.
The company has managed to grow its top line at a compound annual growth rate (CAGR) of 22.61% over the past ten years, while its bottom line has increased at a CAGR of 21.50% during the same period.
This combination of revenue growth, strategic expansion, and a resilient business model makes Lithia Motors Inc. (NYSE:LAD) an attractive stock. Additionally, LAD can be considered cheap at current levels. The stock is trading at only 11 times its forward earnings, a 35% discount to its sector median.
According to Insider Monkey’s database, 35 hedge funds held stakes in Lithia Motors Inc. (NYSE:LAD) in the second quarter of 2024. This brings LAD to the 6th spot on our list of the best used car stocks to buy according to hedge funds.
Overall LAD ranks 6th on our list of the best used car stocks to buy according to hedge funds. While we acknowledge the potential of LAD 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 LAD but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
READ NEXT: $30 Trillion Opportunity: 15 Best Humanoid Robot Stocks to Buy According to Morgan Stanley and Jim Cramer Says NVIDIA ‘Has Become A Wasteland’.
Disclosure: None. This article is originally published at Insider Monkey.