Automakers are on pace for their best sales year since 2007, and car stocks are reflecting that possibility.1 The First Trust NASDAQ Global Auto Index Fund (CARZ), which corresponds generally to the price and yield of the NASDAQ OMX Global Auto Index(SM), an index that is designed to track the performance of the largest and most liquid companies engaged in the manufacturing of automobiles, has been steadily increasing over the past 12 months (see the chart right).
This could be an indication of the high performance of auto stocks, but also a signal that now may be the time to focus on value. After the big rally in autos, Annie Rosen, who manages the Fidelity Select Automotive Portfolio (FSAVX), cautions that investors should consider being selective.
Flying off the lot
While the city of Detroit is facing severe financial troubles, U.S. auto producers—most of which operate out of the Motor City—are bringing in solid revenues. Improving sales have underpinned a turnaround for these companies. Consider that less than five years ago, General Motors (GM) and Fiat subsidiary Chrysler (FIATY) had to be rescued from financial ruin by the U.S. government.
More cars, less driving?
Sales for July 2013 were strong across a range of car makers, compared to the same month in 2012.2 Last month, the “big three” U.S. automakers—GM (GM), Ford (F), and Chrysler (FIATY)—reported year-over-year sales growth of 17%, 11%, and 11%, respectively. Japanese automakers Honda (HMC), Toyota (TM), and Nissan (NSANY) posted robust growth of 21%, 17%, and 11%, respectively. Of the major automakers, Volkswagen (VLKAY) stands out, having posted relatively tame sales growth of 0.3%.
It’s worth noting that the U.S. retail sales report released on August 13, 2013 showed auto sales actually declining 1% month-over-month in July, after having climbed 2.9% in June. That could have been a small step back in what has otherwise been a very healthy run for carmakers. "I think that these strong U.S. auto trends may having staying power over the intermediate term," notes Rosen.
Auto stocks are rolling
A strengthening housing market, rising consumer and investor confidence, a steadily recovering employment picture, and pent-up demand hanging over from the financial crisis have all contributed to the pickup in sales. Those same factors have played a role in helping support the broad stock market rally, yet almost all the major auto companies have outrun the broad market.
GM (73%), Ford (80%), Toyota (59%), and Honda (21%) all top the S&P 500® Index’s 20% gain over the past 12 months, as of August 21, 2013. The biggest outperformer by far has been electric car maker Tesla (TSLA), up a staggering 365%.
Strong auto stock performance is even more impressive considering that average gas prices have remained just below all-time highs (see the chart below).
Whether the better sales may be due to some consumers replacing older vehicles with fuel-efficient ones as gas prices remain elevated or the marketplace fundamentally returning to normal levels of demand, auto stocks are reaping the rewards of revved up sales.
Valuations and potential opportunities in the auto industry
Any time a segment of the market outruns the market by such a wide margin, valuation is one factor that you may want to further assess. Despite the big rally in auto stocks, Rosen thinks potential opportunities remain in the auto segment. "I believe there's value in those original equipment manufacturers and suppliers geared toward a combination of product cycle, global secular growth themes, and leading cost positions."
When conducting your own analysis, the price-to-earnings growth (PEG) ratio is one valuation metric that can be used to help assess a stock’s value. Generally, the lower the PEG ratio, the more the stock may be undervalued. This is just one metric of the many fundamental factors that you should assess when considering investing in auto stocks. Be sure to conduct your own research, taking into account your risk and return objectives.
You can search for opportunities in this space by going to the Fidelity screener and filtering for stocks in the auto industry. As of August 21, 2013, the major automakers that trade as common stocks or depository receipts with the three lowest PEG ratios are:
- Volkswagen AG (VLKAY)—PEG Ratio: 0.05
- Toyota (TM)—PEG ratio: 0.58
- Ford (F)—PEG ratio: 0.77
Note that General Motors (GM) and Tata Motors (TTM) return no PEG ratio in the screener, and Tesla (TSLA) currently returns a negative PEG ratio.
The price-to-sales (P/S) ratio can be a strong valuation metric when attempting to compare investments that have some negative price multiples—like Tesla(TSLA)—because the P/S ratio cannot be negative (a firm cannot have negative sales).
The screener shows that, as of August 21, 2013, the major automakers that trade as common stocks or depository receipts with the three lowest P/S ratios are:
- Volkswagen AG (VLKAY)—P/S ratio: 0.28
- General Motors (GM)—P/S ratio: 0.32
- Ford Motor (F)—P/S ratio: 0.44
Keep an eye out for bumps in the road
You should carefully weigh all of the relevant factors that can influence auto stocks before making any investment decision. For example, whether you believe sales have reached a saturation point. Additionally, rising rates might curtail the ability of some buyers to obtain affordable loans. Higher gas and vehicle input prices (like steel, aluminum, and rubber) have the power to chase away buyers and dent profitability. Despite car stocks having a lot of momentum, these are some of the risk factors to analyze.
Nevertheless, the auto industry seems to have found its groove in the wake of the financial crisis. Similar to buying a car, if the ride in auto stocks is going to continue you may want to focus on finding value.