3 Ways to Safely Play the Rebound In Automotive Retail
Automotive retail stocks flashed green across the board in Aug. 16 trading.
The five-largest automotive retail stocks by market cap gained an average of 5.67% on the day, 28x higher than the S&P 500.
Four of the five stocks have been on a tear over the past month, valiantly trying to recover some losses experienced in the first half of 2022. There are plenty of skeptics about the current bear market rally.
“We would caution investors not to get too bulled up or chase this rally,” Bloomberg reported Solita Marcelli, chief investment officer Americas at UBS Global Wealth Management, said. “There is a decent risk that the Fed has to hike rates more than we and the market are currently expecting, a possibility that would quickly cool the warming sentiment. That would also increase downside risks to growth, which are already prevalent.”
Given that the five-largest automotive retail stocks have gained an average of 14.65% over the past month -- 251 basis points higher than the index -- it might be a good idea to bet conservatively.
Here are three ways to do this.
Penske Automotive Group
Penske Automotive Group (PAG) is up 18.98% over the past month and 17.07% year-to-date. It’s gained most of its 2022 returns in the past 30 days.
The operator of automotive and commercial truck dealerships reported record Q2 2022 results at the end of July. They included record quarterly earnings of $741.9 million, 42% higher than a year earlier, on a 9% increase in revenue to $13.9 billion.
CEO Roger Penske is still delivering for shareholders at 85. Over the past 20 years, with Penske in the top job, Penske stock’s appreciated by 1,378%. That’s more than 4x the index's performance over the same period. There is no question that Penske is good at running an automotive retailer. He’s more than proven his mettle.
However, for those who don’t want to take the risk that they’ve missed the boat, you might be better buying into the Cambria Value and Momentum ETF (VAMO).
Well-known portfolio manager Meb Faber runs the actively managed fund. The fund focuses on value, momentum, and tactical factors to select a portfolio of stocks. It currently holds 105 positions, including Penske Automotive, with a weighting of 0.94%.
Lithia Motors
Lithia Motors (LAD), unlike the other names in this article, is actually down 0.96% over the past month and 6.29% YTD.
The stock failed to ride the automotive retail wave due to missing analyst estimates in the second quarter. Analysts were expecting Q2 2022 EPS of $12.25. The retailer delivered $10.75, 12% shy of the consensus. On the top line, it reported $7.20 billion in revenue in the quarter, $90 million shy of analyst expectations.
However, in the end, there’s nothing wrong with a 20% increase year-over-year in revenue and an 11% increase in EPS. Plus, analysts generally like it. The median target price is $426.50, 53% higher than its current share price.
Those looking to play Lithia but not take on as much company-specific risk ought to consider the First Trust Dorsey Wright Momentum & Value ETF (DVLU). The ETF tracks the performance of the 50 most undervalued stocks in the Nasdaq US Large Mid Cap Index that also possess high relative strength and momentum levels.
Reconstituted and rebalanced quarterly, Lithia has a 2.39% weighting. That makes it the 20th largest position. The ETF also holds Penske (2.72%) and Autonation (2.65%).
Autonation
Like Penske, Autonation (AN) is up 15.94% over the past month and 13.57% year-to-date, suggesting that it was underwater before the July/August surge.
Bill Gates is the largest shareholder of Autonation. At the end of February, he held 9.87 million shares of the company, representing a 16.1% ownership stake. That’s down from 20.33 million shares, or 22.6% in February 2019. Of course, the stock is up more than 238% over the past 3.5 years, so it makes sense to take some profits off the table.
However, I don’t imagine Gates will ultimately sell his stake in the company. It’s been in the Cascade Investment LLC portfolio since 2009. It’s a perennial winner.
Autonation reported record second-quarter earnings at the end of July. Sales fell 2% YOY to $6.9 billion. While new car sales decreased 14% during the quarter, used car revenue jumped 13% compared to a year ago. On the bottom line, it generated $6.48 a share in earnings during the quarter, 34% higher than a year ago.
The biggest highlight from the Q2 2022 report was the gross profit per new vehicle. It was up a whopping 47% to $6,106. CEO Mike Manley, who used to run Jeep, believes it will continue to deliver strong gross profits on new vehicles for the remainder of the year.
For those investors concerned that the bear market rally is about to end but like the idea of betting on Autonation’s ongoing momentum, you might consider investing in the Invesco DWA Consumer Cyclicals Momentum ETF (PEZ).
PEZ tracks the performance of the Dorsey Wright Consumer Cyclicals Technical Leaders Index, a collection of consumer cyclicals showing strong momentum. The ETF currently holds 43 stocks. Autonation is in the top 10, with a weighting of 3.41%. The top holding is O’Reilly Automotive (ORLY), which retails automotive aftermarket parts. It, too, is an excellent stock.
If you don’t like PEZ, I’ve already mentioned VAMO and DVLU. Autonation’s weightings in those two ETFs are 0.88% and 2.65%, respectively.
Of the three ETFs, DVLU has the best three-year annual total return, up 12.38%. It holds all three automotive retail stocks mentioned in this article.
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