How Cramer’s Playing the Auto Bull Market
"The auto bull market is very much alive," Jim Cramer said Friday, "And Hurricane Sandy has given it a major boost."
In the wake of the superstorm's widespread destruction, the "Mad Money" host noted some reports suggest at least 200,000 cars will have to be purchased. To play the increased demand for autos, Cramer recommends looking at companies that actually sell cars.
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Take AutoNation and CarMax, for example. Both stocks currently trade at roughly 15 times earnings. Each stock is up about 9 percent year-to-date, too. In fact, Cramer noted each has performed well over the long-term — over the last decade CarMax has climbed 300 percent while AutoNation has gained 260 percent. Over the last five years, though, AutoNation has outperformed CarMax with gains of 144 percent versus 67 percent respectively.
There are a few other differences to consider, too. In September, CarMax reported a miss, yet it rallied on the report, even though the stock has since pulled back from its highs. The next month, AutoNation reported a beat, but its stock sold off.
To Cramer, both companies are attractive, but he currently prefers CarMax's stock.
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"For the first time in years, the used car market is poised to start outperforming the new car market and CarMax is the one that sells used cars," Cramer said, adding CarMax happens to be the largest retailer of used cars in the United States with 108 superstores in 53 different markets. "In recent years, used car retailers have struggled against a serious headwind, which is that the recession caused a huge decline in the supply of late model used cars … thanks to the recent boom in new car sales, the supply of used vehicles that are zero to six years old is now starting to rebound."
AutoNation does have some used car exposure, Cramer said, but its business is primarily selling new vehicles. The growth will be in used cars, he said. CarMax has a "turbocharged growth story," too, with plans to expand its store count from 100 locations to over 300 with 10 percent square footage growth per year.
In the end, Cramer thinks both AutoNation and CarMax are the "best of the bunch" in the auto sales space, but he prefers KMX for the time being.