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 online automotive marketplace platform with a large selection of car listings.
CarGurus Inc. (NASDAQ:CARG) is a multinational, online automotive platform that facilitates the buying and selling of vehicles. The company offers a comprehensive marketplace that empowers consumers to confidently purchase or sell cars either online or in person. The company provides dealerships with tools to accurately price, market, and quickly sell vehicles, leveraging proprietary technology and data analytics to ensure transparency and competitive pricing. It is one of the most visited automotive shopping sites in the US. The company also operates online marketplaces in Canada and the United Kingdom.
The company is focused on driving future growth by enhancing its platform and services for dealers and consumers. In the second quarter of 2024, the company achieved a 15% year-over-year increase in listings revenue, thanks to strong lead growth and improved traffic conversion rates. CarGurus Inc. (NASDAQ:CARG) has introduced innovative tools like the Next Best Deal Rating, which helps dealers optimize their pricing strategies, resulting in increased vehicle visibility and faster sales. This tool has gained significant traction, with over 9,200 dealers adopting the tool within just 3 quarters of its launch. The company’s newest product Maximize Margin uses data to inform dealers how much they can increase the price of a vehicle without risking their deal ratings.
In the Q2 2024 earnings call, management highlighted that approximately 50% of dealers who have used CarGurus' services for over a year have increased their spending through add-on products, upgrades, and contract renewals. Notably, 36% of all contracts signed during the quarter were for six months or longer, indicating a strong commitment from dealers. These trends reflect CarGurus Inc.’s (NASDAQ:CARG) growing value to its dealer partners and its ability to enhance customer engagement and satisfaction.
At the same time, the company is actively investing in enhancing its consumer app, which contributed to 28% of its leads. The company has simplified the vehicle search process and personalized the experience for returning users, resulting in a 16% increase in one-month app retention rates. In addition to app improvements, CarGurus Inc. (NASDAQ:CARG) is advancing its AI initiatives to streamline the shopping journey, offering features like conversational search and vehicle recommendations. These efforts have solidified CarGurus' position as the most visited automotive marketplace, with 56% more visits than its closest competitor.
In Q2 2024, CarGurus Inc. (NASDAQ:CARG) reported consolidated revenue of $219 million, a 9% decline year-over-year, primarily due to lower wholesale and product volumes. However, the company’s marketplace business thrived, achieving $195 million in revenue, which is a 14% increase year-over-year. This growth was driven by a rise in subscription-based listings and the adoption of add-on products, reflecting the company’s strong value proposition for dealers. The company was also able to expand its dealer base by 255 year-over-year, reaching the highest number of paying dealers since early 2020.
The company's international business remains a key focus area, with revenue increasing by 21% year-over-year in the second quarter, primarily due to the growth of the dealer base.
According to Insider Monkey's Q2 2024 database, 32 hedge funds held stakes in CarGurus Inc. (NASDAQ:CARG), an increase from 25 hedge funds in Q1 2024. This growth in hedge fund interest reflects a rising confidence in the company's potential and performance.
With a focus on product innovation and enhancing the consumer experience through AI and app improvements, CarGurus Inc. (NASDAQ:CARG) is well-positioned to capture a larger market share in the automotive sector.
Overall CARG ranks 7th on our list of the best used car stocks to buy according to hedge funds. While we acknowledge the potential of CARG 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 CARG but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
