Used-car sales are softening, according to BTIG analyst Marvin Fong. That could be viewed as a problem for new car sales and vehicle pricing, but Fong isn’t worried.
He says recent trends amount to noise and that other positive factors are working in the car industry’s favor. That good news for the automotive universe is a plus for the entire economy because the auto universe is huge: New and used-car sales account for trillions of dollars in economic activity, affecting everything from auto manufacturers to components makers and finance companies, as well as dealers and sellers of parts for repairs.
“Auto sales have been choppy for several weeks, but the overall trend has been one of gradual weakening on the used car side while new car sales have been flattish,” wrote the analyst in a Wednesday research report.
That could be a risk for auto-related stocks, but new car inventory at dealerships plummeted during the pandemic and new product launches were delayed. Now car inventories are increasing, which might be changing the mix of sales slightly.
What is more, Fong points out that the percentage of the population expecting to buy a car in the coming six months has rebounded from pandemic-induced lows. About 20% of the population expects to buy a car soon. That’s the same percentage as March and April and up from recent lows of about 14% in September.
Fong covers mainly online providers of auto-related data and sales services. That’s another industry that benefits from a recovery in U.S. auto activity.
He rates stock in CarGurus (ticker: CARG) and Cars.com (CARS) at Buy. His price targets for that pair are $28 and $13, respectively. Fong rates TrueCar (TRUE) stock at Hold. He doesn’t have an official price target for TrueCar shares.
The data provider Cox expects about 14.3 million new-cars sales in the U.S. in 2020, down from about 17 million in 2019. The used-car market is more than double the size of the new-car market, with about 40 million in annual vehicle sales.
Used-car sales were up about 17% year over year in the third quarter of 2020 after dropping 20% in the second quarter. New-car sales were still down about 10% year over year after dropping almost 40% in the second quarter.
The most important thing for U.S. auto stocks is to see new- and used- car sales improving and hitting pre-pandemic levels in 2021.
The Russell 3000 Auto & Auto Parts Index is actually up about 150% year to date, far better than comparable returns of the S&P 500 and Dow Jones Industrial Average. But that is because the index includes Tesla (TSLA). Tesla stock is up about 573% year to date.
Stocks of parts suppliers are up about 16% on average. Ford Motor (F) stock is down about 4%. General Motors (GM) shares have gained 23%. Dealer and distributor stocks are up about 30% on average. Carvana (CVNA) shares are up more than 150%.
The online platforms Fong covers are down about 18% year to date. Auto-parts retailers are also down year to date, falling about 5% on average.
Write to Al Root at allen.root@dowjones.com
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November 26, 2020 at 02:08AM
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Used-Car Sales Are Slowing Down. Time to Worry? - Barron's
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