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 AutoNation Inc. (NYSE:AN) 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).
An AutoNation-branded dealership, showcasing the wide variety of new and used vehicles on offer.
AutoNation Inc. (NYSE:AN)
Number of Hedge Fund Investors: 38
AutoNation Inc. (NYSE:AN) is one of the largest automotive retailers in the US. It is known for its extensive network of over 300 dealerships that offer a wide selection of new and used vehicles. The company generates revenue primarily through vehicle sales, with a significant portion coming from its used car segment. AutoNation also provides financing options, parts, and expert maintenance and repair services to enhance the overall customer experience.
In its second quarter of 2024, the company demonstrated strong resilience despite challenges from the CDK outage that affected operations. New vehicle sales were down by 2%, but the company saw a 6% unit growth for its import brands. While used vehicle sales decreased by 8% for the quarter year-over-year, demand remained strong, indicating a healthy market. Effective sourcing and pricing strategies in the used car segment remain a key focus area for the company.
During the system outage, AutoNation Inc. (NYSE:AN) manually processed nearly 60,000 repair orders. This highlights the company’s commitment to customer satisfaction and operational resilience, even in tough situations.
The company also showcased solid financial management, with significant cash generation allowing for strategic capital deployment, including the repurchase of over 5% of its shares since the beginning of this year. The company’s commitment to delivering value to shareholders, combined with its operational strength and strategic focus, makes AutoNation Inc. (NYSE:AN) an attractive stock for investors. AN can be considered cheap at current levels. It is trading at only 10.08 times its forward earnings, a 41% discount to its sector.
In the second quarter, AutoNation Inc. (NYSE:AN) was held by 38 hedge funds, with total stakes amounting to $616.27 million, according to Insider Monkey’s database. Brave Warrior Capital emerged as the largest shareholder, holding a position worth $156.07 million as of June 30. AN ranks among the top 3 on our list of the best used car stocks to buy according to hedge funds.
Alluvium Asset Management stated the following regarding AutoNation Inc. (NYSE:AN) in its second quarter 2024 investor letter:
“Autonation (down 3.7%) operates around 350 dealer franchises across the US, as well as collision centres and used vehicle stores. When compared to Group 1, it sells more units at a slightly higher price and margin, and derives around 50% more revenue. But its strategy is different, with nationwide branding and centralised operations. Although we prefer the Group 1 model, the economics of Autonation look attractive to us. And by introducing this into the portfolio we could thereby invest more than 5% of assets in this sector without necessitating the sale of other attractive large positions. And so after selling a little Group 1 and buying Autonation we ended the quarter with 4.1% and 1.9% positions respectively.”
Overall AN ranks 3rd on our list of the best used car stocks to buy according to hedge funds. While we acknowledge the potential of AN 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 AN 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.