If you’re looking for investment ideas, it’s hard to go wrong by checking in on Warren Buffett. Just about every week, it seems, Buffett and his well-known conglomerate Berkshire Hathaway (NYSE: BRK.A) announce yet another major stock purchase or business acquisition with dollar signs written all over it.

In an interview with CNBC a couple weeks ago, for example, Buffett revealed an all-cash buyout of privately held Van Tuyl Group, the nation’s fifth largest auto dealership with annual revenue of about $9 billion and 78 locations in 10 states. Van Tuyl will be renamed Berkshire Hathaway Automotive, and the current owner, Larry Van Tuyl, will stay on as chairman.

For individual investors, the most important revelation was that Buffett sees value in the auto dealership industry overall and plans to buy “a lot more car dealers” in coming years.

You see, a huge factor in favor of auto dealerships right now is pent up demand. Because of tougher times in the economy, many people have been putting off new vehicle purchases and keeping their old cars pretty much until the bitter end. According to Mr. Van Tuyl, who was with Buffett at the CNBC interview, the vehicles serviced at his dealerships have an average of 70,000 miles on them — more than at any time during his four decades in the auto business.

Such statistics suggest many millions of vehicles will have to be replaced in coming years as advanced age forces them off the road. Because of this, Van Tuyl said total industry sales volume is set to progressively climb to 18-to-19 million units per year from 17 million now.

Thus, it appears there’s a broad trend for individual investors to capitalize on. And I’m confident investors can do very well as shareholders of AutoNation, Inc. (NYSE: AN), a stock I profiled earlier this year. AutoNation, the largest auto dealership in the United States with a market value of $6.1 billion and annual revenue of $18.1 billion, should have more than 80% upside during the next five years.

However, investors willing to take on more risk could do substantially better with a smaller, but extremely fast-growing auto dealership that’s currently the sixth largest in the United States. This $2.1 billion company, which operates mainly in the western United States and has annual sales of $4.4 billion, nearly doubled net income in each of the past three years to the current $121 million.

What’s more, the firm’s earnings per share of $4.46 are nearly twice its 2010 bottom line of $2.21 a share. Since late 2011, its stock has soared nearly 330%. And although shares have pulled back sharply, like many small-cap stocks lately, I think the price could easily double or better in coming years.

Whatever happens to its stock in the near-term, there’s one huge reason to be bullish on Lithia Motors, Inc. (NYSE: LAD) in the long run: It’s the only major auto dealership mainly serving rural areas, which other larger dealers tend to shun in favor of metropolitan and suburban regions. In fact, this competitive advantage is so great, Lithia’s locations typically have no competitors within 100 miles, according to Morningstar.

A particularly good example of this advantage is Alaska, where Lithia owns three of the state’s seven Chevrolet dealers. Having such a large share of smaller markets gives Lithia pricing power, Morningstar points out.

As a major player, the firm’s also well-positioned to take advantage of industry fragmentation, which is extreme. Indeed, there are more than 17,000 auto dealerships nationwide.

Most of these are local mom-and-pop operations, many of which are ripe for acquisition — an area where Lithia has been especially proactive since management sees buyouts as the firm’s main driver of future growth. After acquiring six or seven dealerships a year for the past couple years, management says it plans to double its pace of acquisitions going forward. The goal is for Lithia to increase EPS by about 30% to $6.00 within a few years.

That should be no problem. Most analysts already see Lithia surpassing $6 a share next year.

Among the latest deals that should propel earnings growth was a buyout last April of Access Ford Lincoln in Corpus Christi, Texas — an excellent match for Lithia since it’s the only Lincoln dealer within a seven-county radius of Corpus Christi. The firm opened a Chrysler Jeep Dodge Ram dealership in Wasilla, Alaska around the same time. Together, these two locations will generate revenue of $105 million a year, management estimates.

But by far the biggest boost should come from the acquisition of DCH, one of the nation’s larger auto dealerships with 27 locations in New Jersey, New York and Southern California. The deal, which closed at the beginning of this month, made Lithia the sixth largest U.S. auto dealer (it was No. 8 before). DCH is expected to add revenue of about $2.3 billion a year when fully integrated.

Risks to Consider: Lithia shareholders must be willing to endure pronounced ups and downs, not only because the auto industry is highly cyclical but because Lithia is a volatile small-cap stock. On October 13, shares dropped more than 20% when the firm reduced its outlook for the fourth quarter and warned that third-quarter performance would probably not meet expectations.

Action to Take –> The recent plunge in Lithia’s stock price is a great buying opportunity. Regardless of whether it disappoints in the near-term, the firm’s a good bet to meet consensus projections for 29%-a-year EPS growth because of its relatively large scale, lack of competition and history of strong acquisitions, particularly the DCH buyout.

Even assuming a very conservative earnings multiple of 10 — investors have historically paid nearly 20 times earnings for Lithia’s stock and shares currently trade for 14.5 times earnings — you’re looking at a target price of $159 during the next five years. That’s nearly 150% upside potential from the current stock price of $64.

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