Navigating the Shifting Tides: Uncovering the Best Used Car Stocks for Savvy Investors

In the ever-evolving automotive landscape, the used car market has emerged as a dynamic and lucrative arena for investors. As consumer preferences and market dynamics continue to shift, identifying the top-performing used car stocks has become a crucial strategy for those seeking to capitalize on this thriving industry. This comprehensive analysis delves into the intricacies of the used car market, highlighting the key trends and factors that are shaping the investment landscape.

Unlocking the Potential: Uncovering the Most Promising Used Car Stocks

Exploring the Dynamics of the Used Car Market

The used car market plays a vital role in the automotive industry, providing affordable vehicle options for consumers and supporting economic growth through job creation in sales, financing, and maintenance. According to IMARC Group, the United States used car market size reached 36.1 million units in 2023, and is expected to grow at a compound annual growth rate (CAGR) of 3.5% during 2024-2032, reaching 50.36 million units by the end of the forecasted period.The used car market is undergoing notable changes, with prices continuing 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.Interestingly, the average days to turn for new vehicles rose to 53 days in Q2 2024, up from 37 days in Q2 2023, reflecting 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.

The Impact of Federal Reserve's Rate Cut on the Car Market

The Federal Reserve's recent decision to cut U.S. short-term borrowing costs by half a percentage point, marking its first rate reduction in four years, has significant implications for the car market. The new key rate now stands at 4.75%-5.00%, aiming to alleviate financial pressures on consumers amid concerns about a cooling labor market and high inflation.While the rate cut could eventually boost new vehicle sales, experts caution that 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, as interest rates will still be more than two and a half percentage points higher than the average levels seen over the past 24 years.The delay in the impact of the rate cut on auto loan rates is attributed to the fact that they are influenced by longer-term bond yields and the performance of loans. As a result, auto loan rate changes can be delayed, and consumers might not see substantial changes in borrowing costs so soon.

Identifying the Top Used Car Stocks: A Hedge Fund Perspective

To compile a list of the 10 best used car stocks to buy according to hedge funds, we utilized the Finviz and Yahoo stock screeners to identify 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, ranking them in ascending order based on the number of hedge funds holding stakes in them as of Q2 2024.Our analysis reveals that Penske Automotive Group Inc. (NYSE:PAG) stands out as a compelling investment opportunity, ranking 9th on our list. The company's diverse operations across multiple countries and its strong market presence in commercial vehicles enhance its overall stability and profitability.Penske Automotive Group Inc. (NYSE:PAG) reported strong financial performance in Q2 2024, achieving record quarterly revenue of $7.7 billion, a 3% increase year-over-year. The company's diversification strategy has paid off, with significant growth in retail automotive and commercial truck businesses. During the quarter, Penske delivered a total of 126,653 new and used units, and its service and parts revenue reached a record $753 million, up 10% year-over-year. Additionally, the gross profit per new vehicle retailed improved by $73, reflecting operational efficiency.Furthermore, Penske Automotive Group Inc. (NYSE:PAG) has made strategic acquisitions to expand its footprint and enhance its capabilities. In July 2024, the company announced the acquisition of Bill Brown Ford in Livonia, Michigan, which is recognized as one of the world's largest Ford dealerships by sales volume. This acquisition is expected to add approximately $550 million in annualized revenue and strengthen Penske's presence in Michigan's largest county by population.Earlier, in June 2024, Penske completed the acquisition of Porsche Centre Brighton and Porsche Centre Doncaster in Melbourne, Australia, expanding its portfolio to a total of 24 Porsche dealerships worldwide. This acquisition is projected to contribute an additional $130 million in annualized revenue.These strategic moves reflect Penske Automotive Group Inc.'s (NYSE:PAG) commitment to growth and its focus on enhancing its automotive retail footprint across key markets. According to Insider Monkey's database, 28 hedge funds held stakes in Penske Automotive Group Inc. (NYSE:PAG) during the second quarter of 2024, with a total investment value of $251.81 million. GAMCO Investors is the largest shareholder, owning a position worth $63.32 million as of June 30.While Penske Automotive Group Inc. (NYSE:PAG) presents a compelling investment opportunity, it is important to note that the used car market is constantly evolving, and investors should carefully evaluate the broader market dynamics and their own investment goals before making any decisions. By staying informed and adapting to the changing landscape, savvy investors can navigate the used car stock market and potentially capitalize on the emerging opportunities.