GPI - Used auto prices are finally falling - watch these stocks

Used automobile price are finally falling back after a torrid rise since January of 2021. The Manheim Used Vehicle Value Index showed price declines for all major segments in July and the first half of August also saw broad price declines. The two-month trend has been that used SUV and pickup prices are falling at the fastest clip, while prices on used vans and compact cars are down just slightly. Key indicators suggest wholesale used-vehicle values should show declines for the second half of August as well.

The used auto market is still in flux due to supply chain disruptions that could impact production and limit inventory on dealer lots well into 2023, although the constrained inventory environment could also build true pent-up demand for a more robust capital goods replacement cycle to be unleased on the other side, per Bank of America analyst John Murphy.

In an interview with Seeking Alpha, Stephens analyst Daniel Imbro called out several auto retailers with upside potential against the backdrop of a normalizing supply chain by mid to late 2023 and improving demand from rental companies. Group 1 Automotive ( NYSE: GPI ) is a favorite of the firm's in the sector with the sale of Brazilian assets expected to be accretive. Imbro also thinks Carvana's ( CVNA ) purchase of Adesa and the auto retailer's last update were encouraging. Falling used auto prices are seen as potentially good for CVNA with affordability one its key problems. As far as the balance sheet, Imbro and team think CVNA has ample liquidity to survive. Elsewhere in the sector, Lithia Motors ( LAD ) and Asbury Automotive Group ( ABG ) are pointed out to be well positioned to outperform into next year. CarMax ( KMX ) is also noted to be trading at discount relative to CVNA and is seen as an interesting stock as the market normalizes and production comes back online late next year.

Despite the market and supply chain turmoil in 2022, a number of auto retail stocks have outperformed so far this year. Kingsway Financial Services ( KFS ) +11.6%, Penske Automotive Group ( PAG ) +9.3%, AutoNation ( AN ) +7.4%, and Sonic Automotive ( SAH ) +4.0% are all in positive territory on a year-to-date basis. Cazoo Group ( CZOO ), Vroom ( VRM ), and Shift Technologies ( SFT ) have showed the steepest losses. VRM and SFT also trade with a high level of short interest as part of the backdrop.

Within the auto retail sector, Sonic Automotive ( SAH ) has the highest Seeking Alpha Quant Rating and is viewed favorably on Wall Street.

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