CarGurus Stocks Outperform the Industry: Here’s Why

Some businesses may soon see the bullish side effects of a resilient consumer under the guise of potential interest rate cuts coming this year from the Fed. According to the FedWatch tool of ECM Group NASDAQ: ECM, these pins could arrive as early as May this year. However, not all actions are created equal.

After chip and semiconductor shortages occurred during the peak months of the COVID-19 pandemic, orders for new vehicles have been increasingly pushed back, creating one of the worst bottlenecks the industry has ever experienced. Now that these orders are being filled as a result of supply chains “returning to normal,” there are no buyers to accommodate the new inventory.

Due to high financing rates and stubborn inflationary pressures, new car buyers are likely looking for the best deal they can get in today’s market, where stocks like CarGurus NASDAQ: CARG become an attractive story today. Because 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 Caravana NYSE:CVNA After rising more than 32.1% in its most recent earnings announcement, spillover effects are becoming increasingly evident across the industry and CarGurus finds itself right in the eye of the storm.

It’s no wonder to see shares trading at 97.0% of their 52-week high prices. On the contrary, competitors like it AutoNazione NYSE:AN and even Advanced auto parts NYSE:AAP I have never seen such kind treatment from the broader markets. These two trades are trading at 77.0% and 41.0% of their 52-week highs respectively.

Basing the trend on price action, you can be sure that investors have found plenty of reasons to look for value and momentum in CarGurus stock; Before we get into everything, here are some.

According to the results of the latest financial quarter, the company reported net income of $22.3 million, or $0.17 per share, with a massive growth of 79.0% over the past twelve months. Remember, this explosive growth occurred when the average buyer couldn’t afford to finance a new vehicle, so most transactions came from the used car market.

Since this same trend that allows for double-digit growth has not seen any substantial change, the following quarter will likely see the same growth figures, if not better. A story without numbers is a fairy tale, and your hard-earned money shouldn’t accompany fairy tales, so here are some figures.

Analysts believe that the company could see another 11.5% growth in earnings per share over the next twelve months, which seems a bit conservative considering 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 taking notice of CarGurus stock for what it could represent in the next quarter or two, starting with some of Wall Street’s largest investors. Investment houses like Point72 (run by Steve Cohen) and other similar names UBS Group New York Stock Exchange: UBS and even Barclays New York Stock Exchange: BCS it came in dripping.

By increasing their holdings in the company, these two institutions have added double-digit percentage points to their positions in a bet for a better future. It should come as no surprise to see the same analysts working at these institutions raise their price targets for the stock as well.

With a price target of $26.0, UBS expects an upside of up to 13.0% from the stock’s trading price today. Analysts at JP Morgan Chase & Co. New York Stock Exchange: JPM they also see 17.4% upside to their stock price target of $27.0; more and more Wall Streeters are 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 P/E ratio of 10.4x, CarGurus trades at a much higher ratio of 17.0x, a premium of 64.0%!

Remember the saying “It has to be expensive for a reason” because it applies to CarGurus the way the markets are rallying it, knowing full well that this stock has plenty of room to continue moving higher.

Price action, institutions, and even the entire market are shaking hands in agreement that this is a damn rally in the making.

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