Berkshire Hathway bets on CarMax

Shares in Carmax, Inc. (NYSE: KMX) soared nearly +16% in the past month, thanks in part to a regulatory filing disclosing the fact that Berkshire Hathaway has taken a 6.4% stake in the used-car retailer. The shares were purchased during the months of July, August and September. Although CarMax has since retreated from the highs as a result of the sell off, this presents a good buying opportunity.

Berkshire Hathaway is the insurance and investing conglomerate controlled by billionaire investor Warren Buffett. Buffett is perhaps the most respected investor in history; his moves are widely followed by Wall Street. It's impossible to know for sure if Berkshire's stake is the result of Buffett's own buying or that of one of Berkshire's subsidiary companies, but either way it's a vote of confidence for CarMax.

KMX has been sliding in recent months due to fears that a consumer slump would impact sales of used cars. But we continue to believe those concerns are overblown. The company offers a unique shopping experience that is unrivaled by traditional used-car dealerships -- the firm's superstores are well-stocked, offer haggle-free pricing, and provide painless trade-ins and vehicle financing.

The used car business is highly fragmented in the U.S., so CarMax has room to grow simply by taking market share from smaller operators that offer less attractive services. With this in mind, my staff and I believe KMX can remain resilient in the face of a consumer slowdown.

KMX trades at less than 20 times next year's earnings, and the company has a projected long-term growth rate of +18%. This represents outstanding value for a proven, fast-growing leader like CarMax, and we think this recent pullback presents an attractive buying opportunity.

If you are interested in more analysis from Paul Tracy, you can find it at StreetAuthority.com