These used car stocks can benefit as tariffs 'leave the station,' says Morgan Stanley's Adam Jonas

Morgan Stanley's Adam Jonas highlights that inflated used car prices, driven by Trump administration tariffs and tight supply, present a significant investment opportunity for auto dealer stocks. The Manheim Used Vehicle Value Index jumped nearly 2% month-over-month and over 6% year-over-year, attributed to trade policy, supply constraints, and consumers front-loading purchases ahead of full tariff implementation and EV tax credit removal. Jonas recommends overweight-rated stocks like CarMax, Carvana, and Group 1 Automotive, noting their potential to capitalize on sustained elevated prices despite broader tariff ramifications for manufacturers, with analyst sentiment largely optimistic for these names.

Analysis

According to Morgan Stanley analyst Adam Jonas, U.S. trade policy is creating a favorable environment for auto dealer stocks by inflating used car values. The Manheim Used Vehicle Value Index substantiates this trend, showing a nearly 2% month-over-month and over 6% year-over-year price increase in June. This surge is attributed to a combination of tariff impacts, tight vehicle supply, and preemptive consumer purchasing ahead of full tariff implementation and the expiration of an EV tax credit. While steel and aluminum tariffs pose a significant risk to domestic car manufacturers, dealers with mixed new and used car operations are positioned to benefit from the sustained price elevation. Among the recommended overweight-rated stocks, performance has diverged significantly year-to-date in 2025: Carvana has surged over 73% and Group 1 Automotive has climbed nearly 14%, while CarMax has lagged with a decline of over 18%. CarMax's underperformance followed its suspension of long-term growth targets due to economic uncertainty, though the stock has recovered over 4% since a better-than-expected Q1 earnings report. Analyst sentiment remains generally positive, with FactSet surveys showing buy ratings from 62% of analysts for CarMax and 55% for Carvana, while sentiment on Group 1 Automotive is evenly split between hold and buy ratings.

Key Decisions for Investors

• Investors should consider overweighting auto dealers with significant used vehicle sales, such as CarMax, Carvana, and Group 1 Automotive, to capitalize on elevated pricing driven by tariff policies and supply constraints.
• Given the significant performance divergence between Carvana's +73% YTD surge and CarMax's -18% YTD decline, it is crucial to assess individual company execution, particularly CarMax's ability to navigate the economic uncertainties that previously led it to suspend growth targets.
• Monitor key catalysts such as the Manheim Used Vehicle Value Index for ongoing price strength, developments in U.S. trade policy, and upcoming quarterly results to validate the sustainability of this investment thesis.