Some businesses could soon see the bullish side effects of a resilient consumer amongst the pretext of potential interest rate cuts coming this year from the FED. According to the FedWatch tool at the CME Group (NASDAQ: CME), these pivots could be coming as soon as May of this year. However, not all stocks are created equal.
After chip and semiconductor shortages experienced during the peak months of the COVID-19 pandemic, new vehicle orders were increasingly pushed back to create one of the worst bottlenecks the industry has ever experienced. Now that these orders are being fulfilled as a result of ‘back to normal’ supply chains, there are no buyers to take in the new inventory.
Because of high financing rates and stubborn inflation pressures, new car buyers likely hunt for the best deal they can get in today’s marketplace, where stocks like CarGurus (NASDAQ: CARG) become an attractive story today. Because the interest rate cuts (potentially) are so far away, today’s consumer will likely find solutions in the used car market, but more on that later.
The trend is here
While it all started with the least expected names like Carvana (NYSE: CVNA) after popping more than 32.1% on their most recent earnings announcement, the spill over effects are becoming more and more apparent throughout the industry, and CarGurus is standing right in the eye of the storm.
It is no wonder to see the stock trading at 97.0% of its 52-week high prices. In contrast, competitors like AutoNation (NYSE: AN) and even Advanced Auto Parts (NYSE: AAP) have not seen such a kind treatment from the broader markets. Those two trade at a respective 77.0% and 41.0% of their 52-week highs.
Basing the trend off of price action, you can rest assured in the way that investors have found plenty of reasons to look for value and momentum in CarGurus stock; before you get into the weeds of it all, here are a few.
According to its latest financial quarter results, the company saw a net income of $22.3 million, which came to be $0.17 per share, a massive 79.0% growth over the past twelve months. Remember, this explosive growth came along when the average buyer could not afford to finance a new vehicle, so most transactions came from the used car market.
Because this same trend allowing for double-digit growth has not seen any material changes, the following quarter will likely see the same – if not better – growth figures. A story without numbers is a fairytale, and your hard-earned cash should not ride along fairytales, so here are some figures.
Analysts think the company could see another clip of 11.5% growth in earnings per share in the following twelve months, which seems to be a bit conservative considering just how much the company has grown. However, it is much better to be surprised; this is still a reasonable growth rate.
Where is the market headed?
Based on this growth and momentum, markets are noticing CarGurus stock for what it could represent in the next quarter or two, starting with some of Wall Street’s biggest investors. Investment houses like Point72 (run by Steve Cohen) and other names like UBS Group (NYSE: UBS) and even Barclays (NYSE: BCS) came trickling in.
Upping their stakes in the company, these two institutions added double-digit percentage points to their positions in a bet for a brighter future. It should be no surprise to see the same analysts who work at these institutions boosting their price targets for the stock as well.
With a $26.0 price target, UBS sees up to 13.0% upside from where the stock trades today. Analysts at J.P. Morgan Chase & Co. (NYSE: JPM) also see a 17.4% upside in their $27.0 a share price target; more and more Wall Streeters are becoming interested in this stock.
Finally, markets are now more than willing to pay a premium valuation for this stock; the reasoning behind this is something you are now more aware of. While the rest of the industry trades at an average price-to-earnings ratio of 10.4x, CarGurus trades at a much higher 17.0x, a 64.0% premium!
Remember the saying “It must be expensive for a reason” because it applies to CarGurus in the way that markets are bidding it up, fully knowing that this stock has a lot of room to keep moving higher.
The price action, institutions, and even the whole market are all shaking hands to agree this is one heck of a rally in the making.
