We recently published a list of Oppenheimer’s favorite stocks for the next 12 months: The 32 best stock tipsIn this article, we’ll take a look at how CarMax, Inc. (NYSE:KMX) compares to Oppenheimer’s other favorite stocks over the next 12 months.

The end of August seems to have marked a new chapter for Wall Street. The highlight of the month was the Federal Reserve’s economic summit in Jackson Hole, where Fed Chairman Jerome Powell was expected to set the tone for the central bank’s rate-cutting cycle. Powell did not disappoint, commenting that “upside risks to inflation have diminished. And downside risks to employment have increased,” leading him to conclude that “the time for policy adjustment is now. The direction is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook, and the allocation of risks.”

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Naturally, investors greeted this with great enthusiasm, and the S&P index climbed 1.01%, just 1% below its record high in July. Before Chairman Powell’s comments, investment bank Oppenheimer had released its latest list of 32 stocks for the next 12 months earlier this month. These stocks were selected based on their fundamentals, say the firm’s analysts, and are the “most up-to-date,” according to the firm’s analysts.

This latest series of stock recommendations comes as the firm has become increasingly bullish on the stock market as 2024 progresses. The year began with a report that set a 2024 target for the main benchmark S&P index at 5,200 points. Currently, the index is at 5,634 points, so it’s safe to say the market has continued to outperform expectations, largely due to investor mania for artificial intelligence. Citing chief investment strategist John Stoltzfus’s 5,200 point index target, analyst James Watt acknowledged that while 2024 is America’s crucial election year, his firm’s clients should focus on the economy instead.

The analyst took an optimistic view, saying that “our economic statistics look good, with growing GDP, continued strong employment, moderate inflation and stable interest rates.” Watt also commented on the interest rate scenario, acknowledging that “long-term interest rates are notoriously difficult to predict.” However, economists’ expectations at the time were “anywhere between one and three rate cuts,” and these could lead to “huge amounts of cash being held back that will eventually be invested in the coming years,” putting further upward pressure on stocks.

One important factor that Watt mentioned is something we have also found in analyses from other investment firms. He shared that “the universe of investable stocks has shrunk significantly over the years,” and also said that “there are only 35 companies with a capitalization of over $200 billion and only 83 companies with a capitalization of over $100 billion.” These “are the companies that have the majority of funds invested in them,” with the analyst warning that the main consequence of this could be that supply and demand “drives the price of these stocks dramatically higher due to limited supply.”

As the second quarter of 2024 came to a close, Watt’s views on the stock market’s breakup based on market cap remained unchanged. In his third quarter 2024 overview, the analyst shared that “the NASDAQ and S&P are not truly diversified in terms of performance.” Since this concentration on just a handful of securities tends to push investors toward an undiversified stock portfolio, the analyst added that this “anomaly has not always been the case, but the long-term benefits of diversification have remained a consistent way to weather various market fluctuations.”

By the third quarter, however, the financial firm’s views on the benchmark S&P index had evolved. At that point, Stoltzfus initially raised the target to 5,500 from 5,200 in March, saying that an evolution in investor mindsets “driven not so much by fear and greed but by the need to invest for medium- to long-term goals provides us with an opportunity to raise our target.” As if that weren’t enough, the strategy chief presented another revision in August.

This raised the target to 5,900 after revising the P/E ratio upward to 23.1 from 22. Two other key factors driving the strategist’s optimism were an innovation cycle that was both cyclical and secular, driving all 11 S&P sectors, and a generational shift in investment strategies that was driven “not so much by fear and greed, but by the need to invest for medium- to long-term goals.”

A month later, Stoltzfus provided an in-depth analysis of the Q2 earnings of the largest 500 S&P index companies to find out which sectors had performed well despite the mixed economic climate. However, this analysis was done just before his firm released its latest 32 stocks, so it is important to know his conclusions from the Q2 2024 earnings season. The strategist shared that the four sectors that posted double-digit earnings growth were healthcare, financials, utilities and consumer discretionary. Their earnings growth was 17%, 13%, 15% and 16%, respectively. Stoltzfus added that nine out of 11 sectors had shown positive earnings growth, with the overall growth of 8.5% leading to a surprising upside.

Looking at the robust dataset, the analyst concluded:

As Oppenheimer continues to keep an eye on developments in the US economy and markets, we decided to find out which stocks are on the company’s radar.

Our methodology

To create our list of Oppenheimer’s top stocks, we sorted the latest list of 32 stocks by analysts’ average percentage increase in share price.

With these stocks, we also mentioned the number of hedge fund investors. Why do we care about the stocks that hedge funds invest in? The reason is simple: Our research has shown that we can outperform the market by mimicking the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks each quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (Further details can be found here).

A satisfied customer inspects a newly purchased used car with the help of a sales assistant.

CarMax, Inc. (NYSE: KMX)

Price increase: -10%

Number of hedge fund investors in Q2 2024: 35

Average analyst price target: USD 77.3

CarMax, Inc. (NYSE:KMX) is one of the largest used car dealers in America. Like Walmart, which has had to evolve to keep up with the rise of e-commerce companies, CarMax, Inc. (NYSE:KMX) has struggled to compete with online used car dealers and companies that offer their franchises to willing buyers. However, Oppenheimer is optimistic about the future, sharing that he is “increasingly optimistic that CarMax’s digital-focused investments in recent years have strengthened key operational and financial levers.” Looking ahead, the key to CarMax, Inc. (NYSE:KMX)’s hypothesis is its ability to scale its digital business model and improve connections between used car sellers and buyers. In addition, the company must ensure that its business model, which is focused on a fixed margin per car, can compete with rivals that are focused on growth and are more willing to sacrifice their margins. Companies like CarMax, Inc. (NYSE:KMX) benefit from a weaker economy, which makes consumers more likely to buy used cars, but this also leads to rising prices. Conversely, in a good economy, prices fall when demand falls, making it harder for CarMax, Inc. (NYSE:KMX) to maintain solid margins.

CarMax, Inc. (NYSE:KMX) management provided key details about its omnichannel and EV sales strategies during the company’s second quarter 2024 conference call:

Total KMX Place 32 on our list of Oppenheimer’s favorite stocks for the next 12 months. While we recognize KMX’s potential as an investment, we believe some AI stocks promise higher returns and do so in a shorter time frame. If you’re looking for an AI stock that’s more promising than KMX but trades at less than 5x earnings, read our report on the cheapest AI stock.

READ MORE: $30 trillion opportunity: The 15 best humanoid robot stocks to buy, according to Morgan Stanley And According to Jim Cramer, NVIDIA has “become a wasteland”.

Disclosure: None. This article was originally published on Insider Monkey.