by   |   January 27, 2015   |   on ,

Follow the Leaders into the Auto Dealers

They say imitation is the sincerest form of flattery.

In the investment business, the big boys care little about such things. They want to make money instead.

So when one big money manager buys a stock or follows an investment theme, others often follow.

You can do the same.

In the second half of 2014, Warren Buffett announced that he was buying an auto dealer company.

The move was typical Buffett. He buys something he knows that has stable cash flows and, in this case, growing cash flows.

Auto sales have enjoyed strong sales growth over the last year or two thanks to strengthening consumer balance sheets domestically and growing economies overseas.

Frankly, the industry is booming with auto manufacturers, parts makers and dealers all benefitting greatly.

Buffett is buying in seemingly late in the game. That should give comfort to those worried about the industry perhaps reaching a near-term peak.

Riding the Buffett coattails is none other than George Soros, who said on Monday that he too is interested in buying auto dealers.

That interest has manifested itself with Soros and his representatives having discussions with a number of dealers.

Perhaps some of those dealers are publicly traded, like Lithia Motors (NYSE: LAD) or AutoNation (NYSE: AN).

Of the two, Lithia makes more sense given its valuation just over $2 billion. AutoNation is a bit more substantial.

Even if Soros is after privately run dealerships, the activity is very positive for both Lithia and AutoNation.

I like Lithia. The stock has gained a very impressive 57% in the last year of trading, with more gains likely to come.

Analysts expect Lithia to grow profits by a very impressive 22% in 2015. At current prices, shares of Lithia trade for only 15 times 2015 estimated earnings.

When investors can buy growth at such a cheap price, profits usually follow.

That also explains why Buffett and Soros are both interested in buying auto dealers at the moment despite the run-up in valuations.

The risk that some see in the auto space is credit.

Has the industry lowered its lending criteria to fuel sales?

Some have even gone so far to suggest similarities to the housing bubble and no-doc loans that resulted in the financial crisis.

While that may be true to a certain extent, homes and cars are two entirely different purchases. The low monthly payments on a vehicle loan make it far easier to pay, even in difficult times and wage stagnation.

In other words the risk of default is much lower.

Still, nothing goes up forever, so it is reasonable to be concerned about auto sales in the future. That’s when the comfort of some big-dog investors like Buffett and Soros comes in handy.

With Lithia Motors, shares are cheap relative to expected profit growth — thus the downside risk here would seem minimal.

I would follow the leader here into the auto dealer space in my portfolio. You should consider the same.