In this article, we will take a look at the 12 most undervalued auto stocks to buy according to hedge funds. To skip our analysis of the recent market trends and activity, you can go directly to see the 5 Most Undervalued Auto Stocks to Buy According to Hedge Funds.
The automotive market is a diverse one and includes companies including original equipment manufacturers (OEMs), component manufacturers, dealerships, and commercial vehicle manufacturers, among others. Automotive technology is poised for change across the world with electric vehicles challenging internal combustion engines and autonomous driving set to disrupt the whole transportation experience and industry. Vehicles are becoming increasingly “smart” to the point where they have turned into “software-defined” vehicles. Latest advancements and updates can be implemented remotely through software changes, a development unthinkable barely few years ago.
The technological changes are also having their impact on the dealership and retail sale side of the picture. Dealerships have been forced to upgrade their sales platforms to include an ever increasing online presence in the form of marketplaces and platforms in addition to the brick-and-mortar dealerships. There is an increasing demand for quick and streamlined sales processes through online platforms without a need for physical visitation. In addition, technology is also helping the distribution network to improve efficiencies across the board through implementation of advanced supply chain management solutions.
Governments around the world have implemented policies that promote and enable the shift towards electric vehicles with the objective of reducing carbon emissions. The European Union has legislated that the OEMs are required to reduce average emissions by 55% by 2030 and 100% by 2035. This translates to selling battery electric vehicles (BEVs) and fuel cell electric vehicles (FCEVs) from 2035 onwards. Several companies have announced their own decarbonization plans, such as Stellantis N.V. (NYSE:STLA), which intends to achieve “100% passenger car battery electric vehicles (BEVs) sales mix in Europe and 50% passenger car and light-duty truck BEV sales mix in the U.S. by end of 2030.”
Despite these bold plans and technological advancements, or maybe because of it, the industry is mired with new challenges. Software-defined vehicles require higher number of semiconductors, the shortage of which caused massive problems for automotive manufacturers in the recent past. In addition, the promulgation of software systems raises cyber security concerns related to these vehicles. On the other hand, the scale of transition to new energy vehicles demanded in the upcoming years requires a massive infrastructure undertaking ranging from manufacturing plants and mining operations to charging stations and electric grid networks.
On the human resource side of things, three leading automaker, General Motors Company (NYSE:GM), Ford Motor Company (NYSE:F), and Stellantis N.V. (NYSE:STLA), were recently struck by labor strikes in United States. United Auto Workers, a labor union, launched a strike against the three companies mentioned above on September 15. The strike effected 44 facilities across the United States with more than 30,000 workers off the job for nearly 6 weeks. The strike was called off during last week of October after UAW reached tentative deals, which included 25 percent raise, enhanced retirement benefits and a faster progression to the top pay, with the three companies.
Most Undervalued Auto Stocks to Buy According to Hedge Funds
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Methodology
To compile our list of the most undervalued auto stocks to buy according to hedge funds, we first made a list of auto stocks with a price to earnings ratio of less than 15. Then, the number of hedge funds that had bought their shares as of September 2023 was determined through Insider Monkey’s database of 910 hedge funds. Out of these, the stocks with the most hedge fund investors were selected. The stocks on our list have been ranked in an ascending order of hedge fund ownership.
Tulsa, Oklahoma-based CarGurus, Inc. (NASDAQ:CARG) is a multinational, online automotive platform for buying and selling vehicles that is building upon its industry-leading listings marketplace with both digital retail solutions and the CarOffer online wholesale platform. The platform boasts 39 million global average monthly unique visitors.
On November 7, CarGurus, Inc. (NASDAQ:CARG) released its financial results for Q3 2023. Its total revenue declined by 49% y-o-y to $219 million, while it reported a net income of $22 million. It generated a normalized EPS of $0.34 for the quarter, $0.08 more than the consensus estimates.
CarGurus, Inc. (NASDAQ:CARG) also announced a definitive agreement to acquire the remaining stake in CarOffer, online wholesale platform for automobiles, for a cash consideration of $75 million. The company had acquired 51% stake in CarOffer at an enterprise valuation of $275 million in January 2021 with the option to purchase the remaining stake in the next 3 years.
As of Q3 2023, 26 of the 910 hedge funds tracked by Insider Monkey held CarGurus, Inc. (NASDAQ:CARG) shares valued at a combined total of $185 million. Michael Pausic’s Foxhaven Asset Management held the highest number of shares among hedge funds, with ownership of 4.8 million shares valued at $84 million.
Stellantis N.V. (NYSE:STLA) is a leading multinational automaker based in Amsterdam, Netherlands. Its vehicles brands include Abarth, Alfa Romeo, Chrysler, Citroën, Dodge, DS Automobiles, Fiat, Jeep, Lancia, Maserati, Opel, Peugeot, Ram, Vauxhall, and mobility brands Free2move and Leasys.
On October 26, Stellantis N.V. (NYSE:STLA) announced plans to invest nearly €1.5 billion to acquire approximately 20% of Leapmotor, a Chinese pure-play electric vehicle company. The companies also intend to form a 51/49 joint venture, led by Stellantis N.V. (NYSE:STLA), with exclusive rights for the export and sale, as well as manufacturing, of Leapmotor products outside Greater China.
Stellantis N.V. (NYSE:STLA) repurchased its shares worth €1.2 billion during the nine months ended September 30. In addition, the company also repurchased an additional €934 million worth of shares in November from Dongfeng Motor Group Company Limited.
Like other stocks such as Ford Motor Company (NYSE:F), Aptiv PLC (NYSE:APTV), and General Motors Company (NYSE:GM), the shares of Stellantis N.V. (NYSE:STLA) are among the most undervalued auto stocks to buy according to hedge funds.
Racine, Wisconsin-based Modine Manufacturing Company (NYSE:MOD) is a global leader in thermal management technology and solutions. It serves customers across commercial, industrial, and building heating, ventilating, air conditioning, and refrigeration markets, and is a leading provider of engineered heat transfer systems and high-quality heat transfer components for use in on- and off-highway original equipment manufacturer vehicular applications.
On November 1, Modine Manufacturing Company (NYSE:MOD) released its financial results for the three months ended September 30, 2023. Its revenue increased by 7% y-o-y to $621 million, while net income increased by 91% y-o-y to $47 million. The normalized EPS of $0.89 surpassed consensus estimates by $0.23.
Following the earnings release EF Hutton analyst Tim Moore raised the price target for Modine Manufacturing Company (NYSE:MOD) shares from $53 to $57 and maintained a ‘Buy’ rating for the shares.
Based in Duluth, Georgia, Asbury Automotive Group, Inc. (NYSE:ABG) is one of the largest automotive retailers in the United States. It offers customers an extensive range of automotive products and services, including new and used vehicle sales and related financing and insurance, vehicle maintenance and repair services, replacement parts and service contracts.
On September 8, Asbury Automotive Group, Inc. (NYSE:ABG) announced an agreement to acquire Jim Koons Automotive Companies, the ninth largest privately-owned dealership group in the U.S., for an aggregate purchase price of $1.2 billion. The target company includes 20 dealerships, 29 franchises, six collision centers and one of the highest volume Toyota and Stellantis dealerships in the US.
In its Q3 investor letter, Black Bear Value Partners, an investment management firm, made the following comments about Asbury Automotive Group, Inc. (NYSE:ABG):
“Asbury Group operates auto dealerships across the United States. While much attention is paid to the number of cars sold, the strength of the model comes from the back of the house in parts and services where more than 50% of the profits come from. We are exiting a period of high margins on new and used car sales. Shortages of inventory have allowed dealers to make record profits when selling a car. As inventories normalize and interest rates rise, I fully expect the dealers to make less profit (called the GPU) when selling a car. Car prices cannot go up ad-infinitum and at some point, there will be buyer pushback. The lower operating costs of the business are not appreciated by the market. They are appreciated by us and the management teams as most dealers, including ABG, have been buying in lots of stock with their free-cash flow.”
Southfield , Michigan-based Lear Corporation (NYSE:LEA) is a global automotive technology leader in automotive seating and electrical distribution systems. It
On October 26, Lear Corporation (NYSE:LEA) released the financial results for Q3 2023. Its revenues increased by 10% y-o-y to $5.8 billion, while its net income surged by 45% y-o-y to $133 million. The normalized EPS was recorded at $2.87 for the quarter, which exceeded consensus estimates by $0.25.
On November 14, the Board of Directors of Lear Corporation (NYSE:LEA) declared a quarterly cash dividend of $0.77 per share which translates to an annual dividend of $3.09 and 2.32% dividend yield.
Following the earnings release, Benchmark analyst Michael Ward reiterated a ‘Buy’ rating for Lear Corporation (NYSE:LEA) and maintained a price target of $188 for its shares which represents a potential upside of 41.12%.
Like other stocks such as Ford Motor Company (NYSE:F), Aptiv PLC (NYSE:APTV), and Lithia Motors, Inc. (NYSE:LAD), the shares of Lear Corporation (NYSE:LEA) are among the most undervalued auto stocks to buy according to hedge funds.
Based in Chicago, Illinois, LKQ Corporation (NASDAQ:LKQ) is a leading provider of alternative and specialty parts to repair and accessorize automobiles and other vehicles. It offers OEM recycled and aftermarket parts, replacement systems, components, equipment, and services to repair and accessorize vehicles.
On August 1, LKQ Corporation (NASDAQ:LKQ) announced completion of the acquisition of Uni-Select Inc., a Canadian company focused on the distribution of automotive refinish and industrial coatings in North America, as well as automotive aftermarket parts in Canada and U.K. The transaction comprised a cash consideration of C$48.0 per Uni-Select share which implied an enterprise value of C$2.8 billion ($1.2 billion).
As of Q3 2023, LKQ Corporation (NASDAQ:LKQ) shares were held by 33 out of 910 hedge funds tracked by Insider Monkey with a total value of $263 million. Its largest shareholder was Arrowstreet Capital with ownership of 1.4 million shares valued at $67 million.
In its Q3 2023 investor letter, Weitz Investment Management, an investment management firm, made the following comments about LKQ Corporation (NASDAQ:LKQ):
"Finally, investors appear to be taking a “wait and see” approach to LKQ Corporation (NASDAQ:LKQ) acquisition of Canadian operation, Uni-Select, particularly as LKQ will pause its stock buyback program to reduce debt taken on to finance the deal. We remain constructive on the combined company's prospects and ability to resume repurchases over the long term."
Group 1 Automotive, Inc. (NYSE:GPI), based in Houston, Texas, is one of the largest dealership groups in the United States. It owns and operates 201 automotive dealerships, 269 franchises, and 41 collision centers in the United States and United Kingdom that offer 35 brands of automobiles.
On October 25, Group 1 Automotive, Inc. (NYSE:GPI) released its financial results for Q3 2023. Its revenues increased by 13% y-o-y to $4.7 billion, while it reported a net income of $164 million translating into a normalized EPS of $12.07, $0.59 above the consensus.
Group 1 Automotive, Inc. (NYSE:GPI) has been on an acquisition spree for the last couple of years and has acquired dealership operations with total expected annual revenues of approximately $4.4 billion during Q1 2021 to Q3 2023. In October, the company completed the acquisition of a Subaru dealership in New Hampshire.
As of Q3 2023, 35 of the 910 hedge funds tracked by Insider Monkey owned shares of Group 1 Automotive, Inc. (NYSE:GPI), valued at $412 million.
