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Is Lithia Motors (LAD) a Smart Long-term Buy?

Alex Smith
·4 min read

Cartenna Capital recently released its Q3 2020 Investor Letter, a copy of which you can download here. The fund posted a return of 5.6% for the third quarter, underperforming its benchmark, the S&P 500 Index which returned 8.93% in the same quarter. You should check out Cartenna Capital's top 5 stock picks for investors to buy right now, which could be the biggest winners of 2021.

In the Q3 2020 Investor Letter, Cartenna Capital highlighted a few stocks and Lithia Motors Inc (NYSE:LAD) is one of them. Lithia Motors Inc (NYSE:LAD) is an American nationwide automotive retailer. Year-to-date, Lithia Motors Inc (NYSE:LAD) stock gained 97.3% and on December 24th it had a closing price of $290.01. Here is what Cartenna Capital said:

"Another key winner during Q3 for the Fund was our long position in Lithia Motors Inc. ("LAD" or "Lithia"). LAD represented a compelling opportunity to own a best-in-class auto dealer at a significant discount and whose fundamental drivers including vehicle miles driven, new/used unit volumes and used pricing, were rapidly accelerating off April's trough levels. Our thesis centered on three idiosyncratic advantages of Lithia over other auto dealers. First, Lithia's geographic breakdown offered meaningful exposure to highly dense urban areas like the Tri-State Region (NYC) and coastal California cities, where we believed public transportation and ride sharing would lose share to private automobile transportation. Second, LAD's rapidly growing used-car business (13.7% same-store sales in 2019) was positioned to disproportionately benefit the Company as 75% of Lithia's used car inventory is 4+ years old. Used cars of this age are typically less commoditized, more recession resistant and generate higher margins. The third, and most compelling, idiosyncratic opportunity emerged as Lithia's management revealed a new digital retail strategy. With this new Driveway.com platform, we immediately deemed Lithia to be the best positioned to address the entire vehicle ownership lifecycle in a digital world, take market share, and expand its multiple as new investors appreciated the omnichannel story. Further, Lithia's new "50 and 50 Plan" outlines a path to achieve $50b1n of revenue and $50 of earnings per share by 2025 (2019: $12.9b1n revenue, $11.76 EPS). Even after a run to $227 per share in late September, LAD continues to offer a tremendous risk-reward profile."

Top 25 Richest, Healthiest, and Most Advanced Countries in the World
Top 25 Richest, Healthiest, and Most Advanced Countries in the World

ben bryant / Shutterstock.com

In Q3 2020, the number of bullish hedge fund positions on Lithia Motors Inc (NYSE:LAD) stock increased by about 58% from the previous quarter (see the chart here), so a number of other hedge fund managers believe in Lithia Motors' growth potential. Our calculations showed that Lithia Motors Inc (NYSE:LAD) isn't ranked among the 30 most popular stocks among hedge funds.

The top 10 stocks among hedge funds returned 216% since the end of 2014 and outperformed the S&P 500 Index ETFs by more than 121 percentage points. We know it sounds unbelievable. You have been dismissing our articles about top hedge fund stocks mostly because you were fed biased information by other media outlets about hedge funds' poor performance. You could have doubled the size of your nest egg by investing in the top hedge fund stocks instead of dumb S&P 500 ETFs. Below you can watch our video about the top 5 hedge fund stocks right now. All of these stocks had positive returns in 2020.

Video: Top 5 Stocks Among Hedge Funds

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, Federal Reserve has been creating trillions of dollars electronically to keep the interest rates near zero. We believe this will lead to inflation and boost real estate prices. So, we recommended this real estate stock to our monthly premium newsletter subscribers. We go through lists like the 10 most profitable companies in the world to pick the best large-cap stocks to buy. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. You can subscribe to our free daily newsletter on our website:

Disclosure: None. This article is originally published at Insider Monkey.