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).
A busy car auction being held at a leading car dealership, buyers and sellers engaging in active bidding.
Copart Inc. (NASDAQ:CPRT), specializing in online vehicle auctions, is one of the best used car stocks to buy according to hedge funds. Founded in 1982, the company has grown from a single salvage yard in California to a global operation with over 200 locations across 11 countries. Copart's online auction platform offers a wide range of vehicles, catering to various buyers, including used car enthusiasts, dismantlers, dealers, body shops, and salvage buyers. With nearly 200,000 vehicles available daily, the inventory includes used, wholesale, and salvage title cars sourced from insurance companies, finance companies, fleet operators, rental firms, dealers, and charities. Through Copart Direct, the company provides a quick and easy way for individuals to sell their used, damaged, or unwanted vehicles.
The company’s success stems from its unique blend of digital and physical assets. Copart’s advanced online auction technology allows users to bid on vehicles from the comfort of their homes, while its extensive inventory spread, spanning over 8,000 acres, supports efficient vehicle management. This combination allows Copart Inc. (NASDAQ:CPRT) to efficiently manage the entire process from vehicle acquisition to sale, serving a diverse customer base and selling over two million vehicles annually.
CPRT recently reported results for the fourth quarter of fiscal ’24. Earnings per share (EPS) of $0.33 fell short of the expected $0.36. Despite this earnings miss, Copart Inc. (NASDAQ:CPRT) reported strong performance in its fourth quarter and fiscal year 2024, with global unit sales increasing by 8% compared to the fourth quarter of 2023. Revenue for the quarter reached nearly $1.1 billion, a growth of about 7%. For the fiscal year 2024, global revenue increased by 10% year-over-year to reach above $4.2 billion, representing growth of over $367 million.
In Q4 2024, the company's US business saw unit growth of over 6% year-over-year, driven by significant increases in both fee and purchase units. Copart’s (NASDAQ:CPRT) international business experienced even more impressive growth, with unit sales rising nearly 17% in the fourth quarter and 21% for fiscal year 2024, compared to the same periods last year.
Notably, non-insurance unit volume growth has continued to outpace unit volume growth from insurance clients, with fleet rental and finance units growing over 20% in the fourth quarter and 28% for the year, compared to the same periods last year. Unit volume growth from car dealers and dealerships also increased nearly 10% for the quarter and over 15% in the fiscal year 2024. This diverse revenue stream highlights Copart Inc.’s (NASDAQ:CPRT) ability to adapt and thrive in a competitive market.
Additionally, Copart Inc. (NASDAQ:CPRT) generated an impressive free cash flow of $962 million for the year, reflecting its operational efficiency and strong financial health. The company continues to invest in expanding its infrastructure. During the Q4 2024 earnings call, management reported that the company has acquired over 1,100 acres of land and 370 transportation assets as well as enhanced physical infrastructure.
Over the past ten years, Copart Inc. (NASDAQ:CPRT) has managed to grow its revenue at a compound annual growth rate (CAGR) of 13.80%, while its net income has increased at a CAGR of 22.53% during the same period.
With a solid track record of growth, Copart Inc. (NASDAQ:CPRT) represents a compelling investment opportunity. It has gained significant interest from institutional investors, with the number of hedge fund holders increasing to 50 in Q2 2024, up from 41 in the previous quarter. This reflects growing confidence among investors in CPRT's long-term potential and its ability to deliver consistent growth.
Overall CPRT ranks 2nd on our list of the best used car stocks to buy according to hedge funds. While we acknowledge the potential of CPRT 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 CPRT but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
