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Used Car Market Emerging as the Dark Horse: 4 Stocks in Focus

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If you were waiting for bigger bargains in used car prices amid coronavirus woes, chances are that you have already missed the boat! Used car prices had been badly hit during March and April. Many industry watchdogs were expecting a further fall in the prices. However, with stay-at-home orders being lifted and business activities resuming normalcy, used car prices are picking up.

The Manheim used vehicle value index hit a record in mid-June, increasing around 4% year over year and recovering from the historic drop in April 2020. Used vehicle prices declined 11% in April from a month ago. Used car values were going into a tailspin, similar to what happened during the 2008 financial crisis. But the prices bounced back strongly in May, up 9% from April levels. The used car market is continuing the momentum in June, which is a pleasant development for used car retailers, automakers and rental car companies alike.

Prices Bounce Back After Collapse: Here’s Why

An abrupt drop in activity due to the pandemic dealt a heavy blow to the used car market, especially in March and April. With shelter-in-place orders imposed on multiple states to combat the spread of the pandemic and dampening consumer confidence, used-vehicle sales nosedived. The prices of used cars also started to crater amid weak demand, unusually timed off-lease inventory and lower auction prices. However, as lockdown restrictions eased, used cars started seeing a recovery in prices driven by a number of factors.

Supply shortage and rising demand of used vehicles on the back of low fuel costs, expensive new vehicles and preference for car ownership rather than usage of public transportation drove the used car prices.

With coronavirus showing no signs of abatement anytime soon, traveling by public transport is not considered a safe choice by many. Private transportation is the need of the hour. Technological development with regard to electric and connected cars amid new emission standards demands huge investment, the burden of which is passed on to consumers. Amid economic slowdown concerns, consumers are getting more inclined toward used vehicles rather than splurging on new cars. As such, sales of used vehicles have held up better than new cars. Further, the unwillingness of people to use ride-sharing services amid coronavirus concerns is supporting the used vehicle prices. Demand for public transport will not recover until a COVID-19 vaccine is developed.

Firms Seeing Recovery in Used Car Sales

Sonic Automotive’s (SAH - Free Report) used vehicle sales have increased since May, after witnessing declines in March and April. Sales of all stores used vehicle unit in the EchoPark segment increased 9% year over year in May versus 30% plunge in April. During the first 15 days of June, the EchoPark unit recorded a 34% year-over-year sales increase.

Penske Automotive’s (PAG - Free Report) used vehicle sales in the United States increased 60% in May from the April level. Re-opening of stores in the United Kingdom since Jun 1 has increased sales by approximately 50% during the first week of June 2020 from the same period last year. 

During the latest quarterly release, CarMax (KMX - Free Report) also notified that the used car unit’s sales have gained traction since May. Web traffic also increased year over year and the company expects the momentum to continue.

Used car and parts enterprise LKQ Corp. (LKQ - Free Report) also provided an update on business operations recently and stated that it has seen weekly sequential revenue improvement since mid-April and its revenues have exceeded projections.

Per Lithia Motors’ (LAD - Free Report) update provided in early June, unit sales of used vehicles returned to solid levels in May. Sales of the same-store used vehicle unit increased around 22% year over year during the last week of May versus a 5% decline witnessed in the beginning of the month. Moreover, for the last week of May, same-store web traffic — reflecting new visits to the company's websites — jumped almost 40% year over year.

Momentum to Persist

According to experts at Auto Trader Group, used car prices would increase in the coming weeks on the back of high demand and low supply. Amid renewed confidence in the market and strong consumer demand, Auto Trader has been witnessing an average of 1.7 million visits every day to its marketplace in June, up 5% year over year.

Dealers are replenishing inventories as auctions are gradually reopening. Last month, various analysts had warned that General Motors and Ford’s finance companies were at risks to lose billions if auction prices remained weak. Per J.D. Power, auction prices are likely to surpass pre-virus expectations in the near term on the back of strong retail sales. The uptick in used car values is encouraging not only for rental-car companies and their creditors but also for automakers and their in-house lenders.

Notably, digital revolution is disrupting used-car retailing. Increased use of dedicated online sites to sell used cars is having a positive impact on the used-car market. The presence of several online car sales sites has enabled buyers to pick a used car through online sites.Used-car online retailers are positioned to thrive not only during the COVID-19 crisis but also in its aftermath amid changing shopping patterns of consumers.

Used car demand from mass-market brands is expected to gather momentum. While highly-priced new vehicles — owing to mounting R&D costs — could deter debt-weary millennials to make big ticket purchases amid coronavirus-led economic slowdown, the used car market is likely to stay strong.

Tap the Uptrend With These Stocks

Sonic Automotive: Sonic’s pre-owned vehicle chain, EchoPark is growing. This is expected to boost the firm’s profitability, going forward. Fiscal 2021 earnings estimates of the firm, currently carrying a Zacks Rank #3 (Hold), suggest year-over-year growth of 81.1%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Carvana Co. (CVNA - Free Report) : The used car e-retailer’s compelling end-to-end online business model and trademark vending car machine are transforming the shopping experience of buyers and driving top-line growth. The company currently carries a Zacks Rank #3. Fiscal 2021 earnings estimates of the firm suggest year-over-year growth of 31.4%.

CarMax: America’s largest used-vehicle retailer, presently carrying a Zacks Rank #3, is positioned for growth on the back of omni-channel efforts, store expansion and digital ramp up to improve customer shopping. Fiscal 2022 earnings estimates of the firm suggest year-over-year growth of 136.9%.

AutoNation (AN - Free Report) : One of the largest automotive retailers in the United States, AutoNation’s brand extension strategy of investing in technology, and adding distribution and collision centers bodes well. Fiscal 2021 earnings estimates of the firm, currently carrying a Zacks Rank #3, suggest year-over-year growth of 36.6%.

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