10 Best Used Car Stocks to Buy
In this article, we discuss the 10 best used car stocks to buy. If you want to skip our detailed analysis of these stocks, go directly to the 5 Best Used Car Stocks to Buy.
The conversations around the automotive sector in the media tend to focus on the electric revolution in the industry and the pivot towards new energy vehicles by big carmakers. However, the used cars market barely gets any attention. This is surprising since used car sales have outstripped the sale of new vehicles in the United States over the past decade. According to Statista, the number of used light vehicles sold in the US in 2019 was close to 40 million.
When compared to the overall new vehicle sales in 2019, which stood at 17 million, the figure represents the value that used car stocks can offer to investors in the coming years. Despite the coronavirus crisis, the number of used cars sold in the US in 2020 stood at around 39 million. The revenue for these firms is expected to increase this year as the prices of used vehicles skyrocket. A release from the Bureau of Labour Statistics indicates that used car prices are the single largest contributor to inflation in the country, with prices increasing by 30% in the past twelve months.
Close to 11% of this increase has come in the months of May and June. Within the used vehicles market, the prices of used pick-up trucks have increased by a whopping 70% in the past year. Investors, who are regularly fed the incredible numbers posted by the electric vehicle industry, led by firms like Tesla, Inc. (NASDAQ: TSLA) and NIO Inc. (NYSE: NIO), should take note of the growth potential of the used car market. Used car sales also benefit traditional automakers like General Motors Company (NYSE: GM) and Ford Motor Company (NYSE: F).
Those who are looking to invest in used car stocks should understand the trends that have played a major role in the growth of the sector and still continue to shape the future. The single biggest disruptor in the industry has been the digital revolution. According to global consultancy McKinsey, end-to-end purchasing abilities, detailed vehicle data and search tools, and attractive delivery options have all played a part in accelerating sales of used cars. Technology has disrupted other sectors of the market too, including the finance world.
The entire hedge fund industry is feeling the reverberations of the changing financial landscape. Its reputation has been tarnished in the last decade, during which its hedged returns couldn’t keep up with the unhedged returns of the market indices. On the other hand, Insider Monkey’s research was able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by more than 124 percentage points since March 2017. Between March 2017 and May 29th 2021 our monthly newsletter’s stock picks returned 206.8%, vs. 91.0% for the SPY. Our stock picks outperformed the market by more than 115 percentage points (see the details here). That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to. You can subscribe to our free newsletter on our homepage to receive our stories in your inbox.
With this context in mind, here is our list of the 10 best used car stocks to buy. These were ranked keeping in mind hedge fund sentiment, analyst ratings, and basic business fundamentals.
Best Used Car Stocks to Buy
10. America's Car-Mart, Inc. (NASDAQ: CRMT)
Number of Hedge Fund Holders: 10
America's Car-Mart, Inc. (NASDAQ: CRMT) is placed tenth on our list of 10 best used car stocks to buy. The stock has returned 54% to investors over the past year. The firm sells used vehicles and is based in Arkansas. It operates more than 150 dealerships, mostly in the central regions of the US. On May 24, the firm posted earnings for the fourth fiscal quarter, reporting earnings per share of $6.19, beating market predictions by $3.39. The revenue over the period was $279 million, up 42% year-on-year.
On July 16, investment advisory Bank of America reiterated a Buy rating on America's Car-Mart, Inc. (NASDAQ: CRMT) stock and raised the price target to $194 from $151, highlighting that the firm was expected to beat earnings expectations for the second quarter.
At the end of the first quarter of 2021, 10 hedge funds in the database of Insider Monkey held stakes worth $84 million in America's Car-Mart, Inc. (NASDAQ: CRMT), down from 11 in the previous quarter worth $70 million.
Just like Tesla, Inc. (NASDAQ: TSLA), General Motors Company (NYSE: GM), Ford Motor Company (NYSE: F), and NIO Inc. (NYSE: NIO), America's Car-Mart, Inc. (NASDAQ: CRMT) is one of the best car stocks to buy.
9. Penske Automotive Group, Inc. (NYSE: PAG)
Number of Hedge Fund Holders: 12
Penske Automotive Group, Inc. (NYSE: PAG) is a Michigan-based transportation firm with significant stakes in the used cars business. It is ranked ninth on our list of 10 best used car stocks to buy. The company’s shares have offered investors returns exceeding 71% over the course of the past twelve months. On July 22, the firm announced that it had developed CarShop, an online retailer for used cars, in collaboration with Cox Automotive. The firm called the project a transformational, fully automated technology platform.
On July 16, investment advisory Bank of America maintained a Buy rating on Penske Automotive Group, Inc. (NYSE: PAG) stock and raised the price target to $141 from $119, underlining that the auto industry was a good bet with low earnings expectations.
At the end of the first quarter of 2021, 12 hedge funds in the database of Insider Monkey held stakes worth $188 million in Penske Automotive Group, Inc. (NYSE: PAG), down from 21 in the preceding quarter worth $114 million.
Alongside Tesla, Inc. (NASDAQ: TSLA), General Motors Company (NYSE: GM), Ford Motor Company (NYSE: F), and NIO Inc. (NYSE: NIO), Penske Automotive Group, Inc. (NYSE: PAG) is one of the best car stocks to buy.
8. Sonic Automotive, Inc. (NYSE: SAH)
Number of Hedge Fund Holders: 17
Sonic Automotive, Inc. (NYSE: SAH) stock has returned 18% to investors over the past year. It is placed eighth on our list of 10 best used car stocks to buy. The company operates as an automotive retailer and sells both new and used cars. It is headquartered in North Carolina. On July 27, the firm announced that it had opened a car delivery centre in Kentucky for people who were using the online platform of the firm to shop for used vehicles that were one to four years-old.
Earlier this year, investment advisory JPMorgan upgraded Sonic Automotive, Inc. (NYSE: SAH) stock to Overweight from Neutral with a price target of $55, noting that the firm had a solid setup for the 2021 fiscal year and would fare better than peers.
Out of the hedge funds being tracked by Insider Monkey, Chicago-based firm Citadel Investment Group is a leading shareholder in Sonic Automotive, Inc. (NYSE: SAH) with 630,265 shares worth more than $31 million.
In addition to Tesla, Inc. (NASDAQ: TSLA), General Motors Company (NYSE: GM), Ford Motor Company (NYSE: F), and NIO Inc. (NYSE: NIO), Sonic Automotive, Inc. (NYSE: SAH) is one of the best car stocks to buy.
7. Asbury Automotive Group, Inc. (NYSE: ABG)
Number of Hedge Fund Holders: 20
Asbury Automotive Group, Inc. (NYSE: ABG) is ranked seventh on our list of 10 best used car stocks to buy. The company’s shares have returned 87% to investors over the past year. The firm operates as an automotive retailer selling new and used cars. In earnings results for the second quarter, posted on July 27, the firm reported earnings per share of $7.78, beating market predictions by $2.69. The revenue over the period was $2.5 billion, up 77% year-on-year and beating estimates by $220 million.
On April 28, investment advisory Truist maintained a Hold rating on Asbury Automotive Group, Inc. (NYSE: ABG) stock but raised the price target to $210 from $180, appreciating the first quarter earnings beat and vehicle sales growth.
Out of the hedge funds being tracked by Insider Monkey, Boston-based investment firm Abrams Capital Management is a leading shareholder in Asbury Automotive Group, Inc. (NYSE: ABG) with 2.1 million shares worth more than $416 million.
Tesla, Inc. (NASDAQ: TSLA), General Motors Company (NYSE: GM), Ford Motor Company (NYSE: F), and NIO Inc. (NYSE: NIO) are some of the best car stocks to buy, just like Asbury Automotive Group, Inc. (NYSE: ABG).
6. KAR Auction Services, Inc. (NYSE: KAR)
Number of Hedge Fund Holders: 22
KAR Auction Services, Inc. (NYSE: KAR) stock has offered investors returns exceeding 16% over the course of the past twelve months. It is placed sixth on our list of 10 best used car stocks to buy. The firm is based in Indiana and markets used vehicle auctions and related marketing services. On May 21, the share price of the firm jumped more than 7% after Bank of America upgraded the stock to Buy from Underperform with a price target of $26, noting that management changes in the firm would fire up performance.
On May 24, investment advisory JPMorgan maintained an Overweight rating on KAR Auction Services, Inc. (NYSE: KAR) stock and raised the price target to $24 from $21, noting that the firm was likely to be a competitor in the digital dealer-to-dealer market.
Out of the hedge funds being tracked by Insider Monkey, Chicago-based investment firm Cardinal Capital is a leading shareholder in KAR Auction Services, Inc. (NYSE: KAR) with 5.8 million shares worth more than $87 million.
Tesla, Inc. (NASDAQ: TSLA), General Motors Company (NYSE: GM), Ford Motor Company (NYSE: F), and NIO Inc. (NYSE: NIO) are some of the best car stocks to buy, alongside KAR Auction Services, Inc. (NYSE: KAR).
In its Q1 2021 investor letter, Argosy Investors, an asset management firm, highlighted a few stocks and KAR Auction Services, Inc. (NYSE: KAR) was one of them. Here is what the fund said:
“KAR’s primary business is engaged in the auction process between dealers and owners of used vehicles (corporate fleets, auto rental companies, dealers’ trade-in vehicles, etc.). Its other business acts as a floorplan lender (they finance the cars on dealer lots until they are sold) to independent dealers, many of whom are purchasing vehicles from KAR’s auction business. I have owned a small position at around $22 per share since January 2020, right before the pandemic started.
I purchased more after the stock price recently fell into the mid-$14 range. KAR reported disappointing earnings and guidance, but I ultimately believe the company’s strong cash flows make it very cheap. I expect this company to generate about $1.40 per share in free cash flow, and that represents a 10% yield on my recent purchase price for a company that earns returns on capital approaching 20%.
There are headwinds to both businesses, mainly due to exposure to the same phenomenon. People are increasingly purchasing cars online via companies like Carvana or through sophisticated dealers such as CarMax which have their own wholesale auction functions. These companies are increasingly placing pressure on mom-and-pop dealers who cannot keep up with the pace of technological innovation occurring in the industry. While I acknowledge this risk, I do not believe this dynamic will prevent KAR from generating lots of cash flow for investors. This is more squarely in the camp of a value investment, and the “hair” on an investment like this does not prevent it from being a successful investment, though I am less likely to hold onto an investment like this for a lengthy period of time.”
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Disclose. None. 10 Best Used Car Stocks to Buy is originally published on Insider Monkey.
