Although cryptocurrencies have generated substantial intrigue and controversy, it may not be the most absurd bull market of stocks to buy right now. Instead, this dubious honor could belong to the used car market.
If you look at the Manheim index for used car prices, its upward trajectory exceeds that of benchmark equities indices and even certain cryptos. Thus, automotive-related stocks to buy have been big winners in the year recently passed.
However, the utterly ridiculous skyrocketing of used vehicles – which in turn accelerated prices of new cars as well – creates massive risks. Basically, what goes up must come down. Thus, analysts at KPMG warn that once global supply chains sort themselves out and the economic machinery starts churning again, used car prices could plummet, perhaps by 20% to 30%. No question exists that auto-related stocks to buy are incredibly speculative at this point.
Still, people have made similar pronouncements of doom about used cars in 2020 – and also in the real estate market. Yet prices stubbornly swing higher because demand consistently outstrips supply. With used cars, related stocks to buy may still benefit from the semiconductor shortage. But it’s not just about tight inventory but rather, chip manufacturers don’t want to produce chips for vehicles because they’re of a higher-effort, lower-margin variety.
If that wasn’t enough of a bottleneck, you must consider the middle of the supply chain. Yes, shipping backlogs have disrupted everything from Halloween costumes to new cars. However, one of the other, less spoken about frustrations is the economic incentive mismatch between longshoremen (who are paid hourly) and truck drivers (paid by the mile). The lengthy delays cause the latter to look for better opportunities, presenting a cynical upside to automotive stocks to buy.
Finally, you must consider the “downstream” component. According to the Wall Street Journal, Americans are keeping their cars longer to a record 12.1 years. Since vehicles do age out or break down, there could still be a rush of demand bolstering used-car prices, even if new inventory improves.
However, one word of warning: These stocks to buy represent one of the most contrarian ideas put forward. Arguably, it’s the most dangerous type of contrarianism: buy high, sell higher. Therefore, only put a small amount of risk capital at play here since these ideas could go spectacularly wrong.
- CarMax (NYSE:KMX)
- AutoNation (NYSE:AN)
- Lithia Motors (NYSE:LAD)
- Penske Automotive Group (NYSE:PAG)
- Carvana (NYSE:CVNA)
- Advance Auto Parts (NYSE:AAP)
- Universal Technical Institute (NYSE:UTI)
Used Car Stocks to Buy: CarMax (KMX)
With a 2021 performance of 37%, CarMax has been a surprising winner. I don’t think there’s ever been a time when buying a mass-manufactured vehicle could result in a robustly profitable investment just a few short years later. Thus, the absurdity of the moment casted doubt as KMX being among the viable stocks to buy.
But as Investor’s Business Daily noted on Dec. 22, the auto retailer “crushed quarterly earnings and sales views, as robust demand and pricing for used cars offset higher costs.” The results were impressive indeed:
CarMax earnings climbed 15% to $1.63. Revenue leaped 65% to 8.5 billion. Retail used unit sales grew 16.9% to 227,424 vehicles. Wholesale units grew 48.5% to 187,630 vehicles. Same-store unit sales increased 15.8%. The average used vehicle price rose 31% to $27,995. SG&A expenses grew 33.7% to $575.9 million vs. a year ago.
As the publication stated, CarMax’s financial results defy the common views about the used-car market slowing down. With the vehicular supply chain experiencing three-tiered disruptions in production, logistics and consumer demand, these issues might not rectify in 2022, thus making KMX a surprising idea among stocks to buy.
An even bigger winner in the new normal for 2021, AutoNation shares jumped more than 60% in 2021.
At the same time, some worries are starting to trickle in. Over the trailing month, AN stock is down almost 5%, which seems to suggest that improving inventory of newer vehicles may deliver good news for car shoppers. That would be bad news for investors of auto-retailer stocks to buy.
However, it’s also important to note that supply chains and inventory of critical commodities might not improve overnight. In late November, Reuters mentioned that the shortage of computer chips forced automakers to be creative. This involved “buying computer chips directly from manufacturers, reconfiguring cars, or producing them with parts missing.”
Now, one of the most effective mitigation measures has been for automakers to dedicate production to their highest-margin vehicles. Obviously, few if any are going to win the volume game in this environment. But that also prices out many households who are looking for relatively accessible personal transportation solutions.
Fundamentally, though it seems grossly unintuitive, AN could be a surprising idea among stocks to buy.
Lithia Motors (LAD)
Although contrarianism regarding stocks to buy implies movement against the grain, there’s always comfort in numbers. Of course, too many numbers and you actually don’t have a contrarian idea but rather one possibly steeped in group-think. But being the only person with an idea is a very lonely place to be – and possibly quite dangerous.
Well, for those who think the concept of auto-retail-related stocks to buy is perilous, you might consider this interesting tidbit. According to a Factset poll of Wall Street analysts, Lithia Motors ranked as one of the top mid-cap securities to consider. As one of the largest automotive group retailers in the U.S., Lithia performed outstandingly in 2020. However, 2021 was pedestrian, up less than 2% for the year. Is it still worth consideration?
As I said earlier, you don’t want to dive into this sector with reckless abandon. However, the consumer fundamentals seem quite positive. Yes, many shoppers are sitting on the sidelines, waiting for prices to drop.
Nevertheless, you must consider that the vehicle also has a say in when it must get replaced. At some point, several consumers must bite the bullet because the alternative is unacceptable.
Used Car Stocks to Buy: Penske Automotive Group (PAG)
Anyone familiar with auto racing knows about the founder of Penske Automotive Group, Roger Penske. A former racing driver himself, Penske the entrepreneur is most known for his exploits at the Indianapolis 500, where he captained 18 teams to victory. But in the new normal, his namesake company has stolen the spotlight thanks to ridiculously unprecedented demand for personal vehicles.
As with many other auto-related stocks to buy, PAG has enjoyed a stellar 2021, gaining about 77%. But unlike some names in the industry, PAG still shows near-term momentum. Over the trailing month, shares are up nearly 8%, while in the final week of 2021, PAG was on pace to hit almost 2% up.
Much of the reason why Penske Automotive could be enjoying the best of both worlds – possible contrarian upside over the long run and near-term positive sentiment – is that its affiliated dealerships cut across a wide income spectrum. For instance, PAG is connected to multiple premium German car brands, which are more insulated from economic fluctuations than brands appealing to a modest income.
With the wealth gap expanding in the new normal, PAG may be surprisingly reasonable as far as contrarian stocks to buy are concerned.
One of the riskier plays among stocks to buy tethered to the super-risky automotive market of 2022, Carvana – which was a huge fundamental winner when the coronavirus pandemic broke out – may lose some relevancy. A growing consensus appears that the omicron variant of Covid-19 causes less severe illnesses than prior variants.
While you don’t want to get infected by omicron, it’s nevertheless good news for the global economy. However, the fading of fear associated with the health crisis may be a headwind for CVNA.
As you know, the bullish thesis revolving around Carvana was that, as an online retailer of used vehicles, the process of purchasing a car was largely contact free. In addition, CVNA saw a dramatic swing higher in 2020, driven by first-time purchases of metropolitan residents who pre-pandemic relied on public transportation.
But with people sick of the lockdowns and various mitigation measures, Carvana admittedly isn’t the brightest member of stocks to buy. However, speculators might still see some opportunity regarding the possibly limited flow of new-car shipments. With semiconductor firms reluctant to feed automakers’ request since they make much more money with consumer electronics, CVNA may still be in the game, surprisingly enough.
Advance Auto Parts (AAP)
As mentioned earlier, Americans are holding onto their vehicles for longer than ever. In part, rising technologies and improved reliability makes this possible. But most importantly, consumers on average may be reaching a threshold where they can no longer justify an auto purchase. Thus, stocks to buy in this segment are super-risky.
However, a counterargument is that unlike cryptocurrencies or publicly traded securities, consumers actually need cars. Yes, they represent a liability (usually) but that doesn’t take away that they are a necessary liability in many locales. And when they break down, consumers might start doing a cost-benefit analysis and just decide to bite the bullet.
Of course, there will be those that refuse, which is where Advance Auto Parts comes in. As an aftermarket parts provider for professional installer and do-it-yourself customers, Advance Auto has enjoyed a superb 2021, up around 52%. If the used-car market doesn’t improve as KPMG analysts forecasted, AAP is something you should look into.
With so much demand for combustion-powered cars – along with the supply chain crunch – parts should command a hefty premium.
Used Car Stocks to Buy: Universal Technical Institute (UTI)
With the final idea for auto-related stocks to buy, I’m going to think a few years down the line with Universal Technical Institute. Sure, it’s not directly associated with the auto retail market. However, Universal Technical trains mechanics, including those for automotive needs and collision repair services. Both segments should be on fire once we get out of this pandemic for good.
Indeed, the Covid-19 crisis may have set back electric vehicles for several years. With consumers panicking over rising used car prices, the integration of EVs within average-income households may take a bit longer than forecasted before the pandemic. That bodes very well for prospective UTI students as demand for mechanics will probably only rise from here on out.
Also, as more people hit the road, collisions will inevitably increase. Again, that augurs well for UTI as an education facility. Post-pandemic, the world doesn’t need more office workers doing dumb stuff on Excel spreadsheets. Instead, they’re going to need blue-collar work – you know, people who can actually do useful things.
Therefore, while UTI probably doesn’t appear on the radar for stocks to buy, this might be a mistake. Keep close tabs on it since a demand wave is coming.
On the date of publication, Josh Enomoto held a LONG position in UTI. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.