We recently compiled a list of the 8 Most Promising Car Stocks 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.
U.S. new-car sales in 2024 continued to grow from their pandemic lows, backed by replenished inventories, increased reductions, and surging demand for hybrid vehicles, as reported by Reuters. According to Wards Intelligence, new car sales in the United States reached 15.9 million in 2024, up by 2.2% from 2023, marking the highest number since 2019. Sales momentum is anticipated to continue into 2025, but demand could be disrupted by proposed policy changes, such as the possible elimination of EV tax benefits. Sales of conventional hybrid vehicles grew by 36.7% year over year, surpassing the growth of electric vehicles as buyers favored trucks, SUVs, and hybrids with gasoline engines over fully electric ones. While several competitors struggled to adjust to the slowing demand for electric vehicles and changing consumer preferences, the top-selling manufacturer of cars delivered 2.7 million vehicles last year, up by 4.3% YoY.
According to S&P Global’s report, US car sales ended 2024 strongly, with December sales anticipated at 1.45 million units, or 16.5 million (seasonally adjusted annual rate: SAAR), which was in line with November’s pace. This caused the average SAAR for Q4 to rise from 15.6 million for the previous three quarters to 16.4 million units, the highest since Q2 2021. Sales are projected to total 16.18 million units in 2025, up 1.2% from the previous year. Nonetheless, affordability, high prices, and persistent inflation continue to be major obstacles. Since June, the battery-electric vehicle share has risen above 8%, reaching 8.6% in September 2024. As purchasers rush to take advantage of the Federal EV subsidies that expire in early 2025, the December BEV share is forecast to surpass 9%.
Looking ahead, Chris Hopson, manager of North American light vehicle sales forecasting for S&P Global Mobility, commented:
“2025 brings with it mixed opportunities and uncertainty for the auto industry as a new administration and policy proposals take hold.” “Unfortunately, the new vehicle affordability issues that coalesced to constrain auto demand levels for much of 2024 will not be resolved quickly in 2025. Vehicle pricing levels are expected to decline but remain high; interest rates are expected to shift further downwards, but inflation levels are anticipated to remain sticky, and new vehicle inventory should also progress, but careful management is expected too. Combined with an uneasy consumer, we project this translates to mild growth prospects for US auto sales.”
Recently, on February 1, 2025, US President Trump announced three Executive Orders restructuring trade with Canada, Mexico, and China, imposing sweeping new tariffs that turned the existential danger to the stability of the North American automobile ecosystem into a reality. The United States imposed a 25% tax on Canadian and Mexican imports, including automobiles, with effect on March 4, 2025. Furthermore, a 10% tariff was imposed on Chinese goods, raising the overall tariff on certain Chinese imports to 20%. A 2.5% MFN tax, a 25% automobile tariff, and a 100% electric vehicle tariff are already applied to some Chinese products. Canadian energy (natural gas and oil) was the only exception, receiving a 10% tariff. In response, Canada imposed a 25% tax on US imports valued at CA$30 billion, with plans to raise the tariff to CA$125 billion after 21 days. Mexico is expected to shortly announce countermeasures in the wake of China’s severe import taxes on non-automotive US goods. The immediate interruption of more than 20,000 vehicles per day across North American production, which consists of 63,900 light vehicles per day (41,700 in the US, 17,600 in Mexico, and 4,600 in Canada), is put at risk by these taxes.
Three scenarios are projected by S&P Global Mobility. According to the firm, there is a 70% chance that the tariffs will be lifted in two weeks with little long-term harm. Secondly, a 20% probability that the disruption will last six to eight weeks, delaying product launches and reducing short-term production before rebounding within a year. Lastly, a 10% “Tariff Winter” scenario with extended tariffs will reduce US vehicle sales by 10%, Mexico by 8%, and Canada by 15% in addition to plant underutilization, sourcing changes, and labor shortages. Mexican production plans are already being reexamined by automakers such as Honda. President Trump used the International Emergency Economic Powers Act (IEEPA) to defend the tariffs, claiming that fentanyl smuggling and illegal immigration were national crises that permitted their implementation without the consent of Congress.
Methodology
We sifted through holdings of Car ETFs and online rankings to form an initial list of 20 car stocks. From the resultant dataset, we chose the top 8 stocks most favoured by hedge funds, using Insider Monkey’s database of 1009 hedge funds in Q4 2024 to gauge hedge fund sentiment for stocks. We have used the stock’s Revenue Growth Rate (year-over-year) as a tie-breaker in case two or more stocks have the same number of hedge funds invested.
Why are we interested in 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 373.4% since May 2014, beating its benchmark by 218 percentage points (see more details here).
Lithia Motors, Inc. (NYSE:LAD)
Number of Hedge Fund Investors: 45
Revenue Growth Rate (year-over-year): 16.58%
Lithia Motors, Inc. (NYSE:LAD) is among the Most Promising Stocks on our list. Since it is the only sizable publicly traded dealer present in rural areas, its business strategy is solid. Larger public dealers find these markets unappealing since their management teams have no concern about small cities and their luxury brand mixes and imports are more suited to suburban markets. Many Lithia brand stores around the country have no rivals within 100 miles, which gives Lithia pricing power.
After a strong fourth quarter of 2024, Lithia Motors, Inc. (NYSE:LAD)’s adjusted diluted EPS for 2024 was $7.79, down 6.4% from the previous year but higher than the $7.24 LSEG consensus. While same-store revenue grew by 3.1% YoY, total revenue rose by 20.2% YoY. Only used vehicles, as well as finance and insurance, saw a decrease in same-store sales. Many buyers still struggle to afford used automobiles, as evidenced by its same-store average selling price dropping 1.6% to $28,478 and its same-store used unit volume declining 4.3% YoY while new vehicle volume climbed by 7.4% YoY.
However, the gross profit per unit of used cars only dropped by 0.9% YoY, and new-vehicle GPU fell by 21% YoY. According to management, new-vehicle GPU is getting close to the point at which the company anticipates long-term stabilization, which is above prepandemic levels. Morningstar analysts anticipate further drops in 2025 and 2026, as the fourth-quarter same-store new GPU was $3,082, and that projection is $2,300-$2,500. Prior to the pandemic, levels were around $2,000.
Madison Mid Cap Fund stated the following regarding Lithia Motors, Inc. (NYSE:LAD) in its Q4 2024 investor letter:
“The top five contributors for the quarter were Liberty Formula One, Arista Networks, Copart, Brookfield Asset Management, and Lithia Motors, Inc. (NYSE:LAD). Lithia Motors reported quarterly results that suggested that at least some of the COVID-induced elevated levels of profitability may be more sustainable than previously thought.”
Overall, LAD ranks 6th on our list of the Most Promising Car Stocks According to Hedge Funds. While we acknowledge the potential for LAD as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns and doing so within a shorter timeframe. 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: 20 Best AI Stock To Buy Now and 30 Best Stocks to Buy Now According to Billionaires.
Disclosure: None. This article is originally published at Insider Monkey.
