Boom-Bust-Boom:
This Cycle Could Pay Off Big In 2023
The car industry is one of the most economically sensitive industries in the world.
They’re the ultimate durable good.
Car buyers can often wait years until economic good times to buy a new one.
And they do.
For example, the 2008 credit crisis drove a total drop in GDP of just 3%.
The auto industry fared far worse.
New car sales fell more than 40% and the industry’s biggest players were forced into bankruptcy.
It’s a real boom and bust industry.
And the last two years have been one of the greatest booms the industry has ever seen.
Car prices have soared across the board. The Manheim Used Vehicle Index went up 80% in the last two years.
But it increasingly looks like the party is over and the hangover is about to begin.
Everything is going to get it. Used cars, new cars, leases. Everything.
The good news though is it won’t last forever.
There will be a recovery.
And when it does, the company we’ve identified as the “Goldilocks” of the auto sales sector will be poised to resume its multi-decade rise.
Here’s a comparison of some top auto stocks so you can see where the industry is really at.
The "Goldilocks" Of Auto Dealer Stocks
Autonation (AN) - Too Hot
Autonation is the largest owner of new car dealerships in the country.
It owns and operates more than 200 dealers in the country and sells around 300,000 vehicles per year
The business is absolutely killing it right now.
We could show how much they are making per sale, service revenues, and everything else going in the company’s favor.
Or we can just show you the Autonation five-year stock chart:
This chart says it all.
Autonation has been one of the few pandemic bull market winners that has held onto most of the gains.
That’s how well it’s doing.
Now, we’re not going to say the downturn in auto sales will cause this stock to get hammered.
But there’s a lot less upside from a company that has held up so well.
As a result, Autonation is just too hot to be a good buy for the sector after the kind of run it has had.
Carvana (CVNA) - Too Cold
If you want to know how bad things can get for the auto industry, look at Carvana.
Carvana is the car crash of the auto industry downturn.
It pitched itself as a technology player for the car sector.
It sold cars online!
But what it really was was a rapidly scaleable generator of subprime auto loans.
When government stimmy and unemployment checks were flying out indiscriminately, subprime loans turned into investment grade and companies like Carvana that were making them made fortunes.
When the free money music stopped though, so did the payments, and so did the value of the loans.
Carvana soared and declined right along with the value of auto subprime auto debt that fueled its rise:
The company has been crushed and it could have even more troubles.
If it survives, it could rebound again.
But that’s too big “if” for regular investors at this point.
Carvana is down 98% for too many reasons.
Carmax (KMX) - Just Right
Carmax is one of the most successful auto dealers in the United States.
It focused on used cars and built its brand on no-haggle pricing.
The company has grown steadily throughout the past two decades on its way to becoming the highest volume car dealer in the United States.
The company sold more than 2,000 cars a day.
It hasn’t been immune to the recent downturn in either the auto industry and the overall stock market downturns.
The chart below shows the company’s long and steady rise and recent major corrections:
That’s a total rise from a split-adjusted $1.20 or so per share in 2000 to an all-time high of $152 per share last year.
That’s a 12,566% gain from bottom to recent peak.
But here’s the thing.
Carmax could be ideally suited to thrive after the coming major auto industry correction.
It has mainly taken a hit because it has a lot of used car inventory that could decline in price as auto prices correct.
But it has the distribution, reach, and access to financing that can make it the big winner in the rebound.
Carmax wasn’t the hottest auto dealer stock during the most recent upswing.
It also wasn’t the biggest dog during the decline.
And given its model and position, it has the potential to be “just right” when the sector rebounds.
Conclusion
The auto industry has been through some major ups and downs.
Every time the industry becomes more efficient and, ultimately, more profitable for the next boom period.
It shall survive this round too.
The key will be spotting the bottom and knowing the best ways to play the rebound.
The Manheim Used Vehicle Index will show you where the bottom is and Carmax has historically been the best way to ride the rebound too.
Remember this when things get really ugly for the auto industry soon and you’ll be prepared to profit from the inevitable rebound.
