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Forget Financials, Buy These 5 Great Auto Stocks Instead
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The final outcome of last week’s closely watched policy meeting came as quite a surprise to most investors. Though the central bank did raise rates as was widely expected, it adopted an unusually cautious tone about the path of future rate hikes. Such a turn of events weighed on financials, widely believed to be the major and most immediate beneficiary of a tighter rate environment.
In contrast, auto stocks, a category which was expected to feel the brunt of higher rates, has performed relatively better. A variety of factors, including low oil prices and a confident consumer, have ensured that these stocks have moved steadily upward. In such a situation, investors would do well to select auto stocks with strong fundamentals over financials.
Fed Turns Cautious, Financials Dip
At the close of its two-day policy meeting on Mar 15, the Fed increased the federal funds rate from a range of 0.5%-0.75% to 0.75%-1%. But contrary to expectations, the central bank declared that it expected to raise rates on only two more occasions this year. This was at wide variance with market expectations of a minimum of three further rate increases.
The Fed’s conservative tone pushed the yield on the benchmark 10-year U.S. Treasury note to its biggest one-day drop since June, falling to 2.500% on Mar 15 from 2.595% the day before. This decline in bond yields spurred some selling in bank stocks
Shares of big banks including The Goldman Sachs Group, Inc. (GS - Free Report) and Bank of America Corp. (BAC - Free Report) declined 0.4% and 0.6%, respectively. Exchange-traded funds that track the financial sector also showed lackluster trade. The SPDR S&P Bank ETF (KBE) was down 0.7%. Financials were the weakest among the S&P 500’s 11 sectors on Mar 15. Since then, the Financials Select Sector SPDR (XLF) has declined 2.1%. (Read: 5 Biggest Winners from the Fed Rate Hike)
Auto Stocks Gain
Meanwhile, a combination of factors has ensured that auto stocks have been faring significantly better. The First Trust NASDAQ Global Auto ETF (CARZ) has gained more than 6% year to date, in line with the S&P 500’s increase. Soft crude prices have been pushing up the sales of utility vehicles and trucks. This is helping to counteract the decline in demand for small cars.
Among major automakers, Ford Motor Company (F - Free Report) General Motors Company (GM - Free Report) and Tesla, Inc. TSLA have gained 1.2%, 2.5% and 22.6%, respectively. Upbeat consumer sentiment has also played a significant role in propelling the sector northward. An increase in rates, leading to an eventual hike in car loan rates, is a factor which has left the sector virtually untouched.
Steady jobs growth and wage gains have played a key role in this regard. U.S. employers added 235,000 new jobs in February, against expectations of 191,000 additions. Wages for American workers, meanwhile, went up 0.2% last month to $26.09 an hour. The sector is also likely to receive significant support from the new administration. Speaking at a meeting with key industry stakeholders, Trump indicated that he would be rolling back the fuel efficiency standards stipulated by the Obama administration.
Price Outperformance, Superior Sector Rank
Performance of Zacks Finance vs Automotive Sector (From Mar 13 to date)
The gap between these two key sectors has become evident over the last week. While the auto sector has managed to inch upward, financials have ended up in the red. This is likely a direct consequence of the Fed’s cautious approach toward the path of future rate hikes.
Meanwhile, the superior performance of the Auto, Tires and Trucks sector is likely to continue since it is ranked among the top 6% of the 16 Zacks sectors. In contrast, Finance finds itself among the top 38%, which explains the widening gap between the two in terms of performance.
Our Choices
Low fuel prices, burgeoning consumer confidence and Trump’s industry friendly approach continue to bode well for the auto sector. In contrast, financials have been weighed down by the Fed’s unexpectedly cautious approach toward future rate hikes.
A superior sector position is another factor which makes adding auto stocks to your portfolios a prudent option. However, picking winning stocks may be difficult.
This is where our VGM score comes in. Here V stands for Value, G for Growth and M for Momentum and the score is a weighted combination of these three scores. Such a score allows you to eliminate the negative aspects of stocks and select winners. However, it is important to keep in mind that each Style Score will carry a different weight while arriving at a VGM score.
We have narrowed down our search to the following stocks based on a good Zacks Rank and VGM score.
Lear Corporation (LEA - Free Report) is a leading global supplier of automotive seating systems, electrical distribution systems and electronics.
Lear Corp has a Zacks Rank #1 (Strong Buy) and a VGM Score of A. The company has expected earnings growth of 10.4% for the current year. Its earnings estimate for the current year has improved by 1% over the last 30 days. The stock has returned 28.5% over the last one year, outperforming the Zacks Automotive - Original Equipment industry, which has gained 21.8% over the same period.
Michelin (MGDDY - Free Report) manufactures and sells tires for all kinds of vehicles, publishes maps and guides and operates a number of digital services.
Michelin has a Zacks Rank #1 and a VGM Score of A. Its earnings estimate for the current year has improved by 6.8% over the last 30 days. The stock has returned 16.1% over the last one year, outperforming the Zacks Rubber – Tires industry, which has gained 12.7% over the same period.
Fiat Chrysler is engaged in designing, engineering, manufacturing, distributing and selling vehicles and components and production systems.
Fiat Chrysler has a VGM Score of A. The company has expected earnings growth of 12.1% for the current year. Its earnings estimate for the current year has improved by 15.9% over the last 60 days. The stock has returned 41.8% over the last one year, outperforming the Zacks Automotive - Foreign industry, which has gained 5.8% over the same period. The stock has a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
SPX Corporation (SPXC - Free Report) is a provider of technical products and systems, industrial products and services, service solutions and vehicle components.
SPX Corp has a Zacks Rank #2 (Buy) and a VGM Score of A. The company has expected earnings growth of 5.4% for the current year. Its earnings estimate for the current year has improved by 3.3% over the last 30 days. The stock has returned 78.9% over the last one year, outperforming the Zacks Automotive - Replacement Parts Market industry, which has gained 3.5% over the same period.
Honda Motor Co., Ltd. (HMC - Free Report) is a leading manufacturer of automobiles and the largest producer of motorcycles in the world.
Honda has a Zacks Rank #2 and a VGM Score of B. The company has expected earnings growth of 66.5% for the current year. Its earnings estimate for the current year has improved by 2.2% over the last 30 days. The stock has returned 12.3% over the last one year, outperforming the Zacks Automotive - Foreign industry, which has gained 5.8% over the same period.
Will You Make a Fortune on the Shift to Electric Cars? Here's another stock idea to consider. Much like petroleum 150 years ago, lithium power may soon shake the world, creating millionaires and reshaping geo-politics. Soon electric vehicles (EVs) may be cheaper than gas guzzlers. Some are already reaching 265 miles on a single charge.
With battery prices plummeting and charging stations set to multiply, one company stands out as the #1 stock to buy according to Zacks research.
Image: Bigstock
Forget Financials, Buy These 5 Great Auto Stocks Instead
The final outcome of last week’s closely watched policy meeting came as quite a surprise to most investors. Though the central bank did raise rates as was widely expected, it adopted an unusually cautious tone about the path of future rate hikes. Such a turn of events weighed on financials, widely believed to be the major and most immediate beneficiary of a tighter rate environment.
In contrast, auto stocks, a category which was expected to feel the brunt of higher rates, has performed relatively better. A variety of factors, including low oil prices and a confident consumer, have ensured that these stocks have moved steadily upward. In such a situation, investors would do well to select auto stocks with strong fundamentals over financials.
Fed Turns Cautious, Financials Dip
At the close of its two-day policy meeting on Mar 15, the Fed increased the federal funds rate from a range of 0.5%-0.75% to 0.75%-1%. But contrary to expectations, the central bank declared that it expected to raise rates on only two more occasions this year. This was at wide variance with market expectations of a minimum of three further rate increases.
The Fed’s conservative tone pushed the yield on the benchmark 10-year U.S. Treasury note to its biggest one-day drop since June, falling to 2.500% on Mar 15 from 2.595% the day before. This decline in bond yields spurred some selling in bank stocks
Shares of big banks including The Goldman Sachs Group, Inc. (GS - Free Report) and Bank of America Corp. (BAC - Free Report) declined 0.4% and 0.6%, respectively. Exchange-traded funds that track the financial sector also showed lackluster trade. The SPDR S&P Bank ETF (KBE) was down 0.7%. Financials were the weakest among the S&P 500’s 11 sectors on Mar 15. Since then, the Financials Select Sector SPDR (XLF) has declined 2.1%. (Read: 5 Biggest Winners from the Fed Rate Hike)
Auto Stocks Gain
Meanwhile, a combination of factors has ensured that auto stocks have been faring significantly better. The First Trust NASDAQ Global Auto ETF (CARZ) has gained more than 6% year to date, in line with the S&P 500’s increase. Soft crude prices have been pushing up the sales of utility vehicles and trucks. This is helping to counteract the decline in demand for small cars.
Among major automakers, Ford Motor Company (F - Free Report) General Motors Company (GM - Free Report) and Tesla, Inc. TSLA have gained 1.2%, 2.5% and 22.6%, respectively. Upbeat consumer sentiment has also played a significant role in propelling the sector northward. An increase in rates, leading to an eventual hike in car loan rates, is a factor which has left the sector virtually untouched.
Steady jobs growth and wage gains have played a key role in this regard. U.S. employers added 235,000 new jobs in February, against expectations of 191,000 additions. Wages for American workers, meanwhile, went up 0.2% last month to $26.09 an hour. The sector is also likely to receive significant support from the new administration. Speaking at a meeting with key industry stakeholders, Trump indicated that he would be rolling back the fuel efficiency standards stipulated by the Obama administration.
Price Outperformance, Superior Sector Rank
Performance of Zacks Finance vs Automotive Sector (From Mar 13 to date)
The gap between these two key sectors has become evident over the last week. While the auto sector has managed to inch upward, financials have ended up in the red. This is likely a direct consequence of the Fed’s cautious approach toward the path of future rate hikes.
Meanwhile, the superior performance of the Auto, Tires and Trucks sector is likely to continue since it is ranked among the top 6% of the 16 Zacks sectors. In contrast, Finance finds itself among the top 38%, which explains the widening gap between the two in terms of performance.
Our Choices
Low fuel prices, burgeoning consumer confidence and Trump’s industry friendly approach continue to bode well for the auto sector. In contrast, financials have been weighed down by the Fed’s unexpectedly cautious approach toward future rate hikes.
A superior sector position is another factor which makes adding auto stocks to your portfolios a prudent option. However, picking winning stocks may be difficult.
This is where our VGM score comes in. Here V stands for Value, G for Growth and M for Momentum and the score is a weighted combination of these three scores. Such a score allows you to eliminate the negative aspects of stocks and select winners. However, it is important to keep in mind that each Style Score will carry a different weight while arriving at a VGM score.
We have narrowed down our search to the following stocks based on a good Zacks Rank and VGM score.
Lear Corporation (LEA - Free Report) is a leading global supplier of automotive seating systems, electrical distribution systems and electronics.
Lear Corp has a Zacks Rank #1 (Strong Buy) and a VGM Score of A. The company has expected earnings growth of 10.4% for the current year. Its earnings estimate for the current year has improved by 1% over the last 30 days. The stock has returned 28.5% over the last one year, outperforming the Zacks Automotive - Original Equipment industry, which has gained 21.8% over the same period.
Michelin (MGDDY - Free Report) manufactures and sells tires for all kinds of vehicles, publishes maps and guides and operates a number of digital services.
Michelin has a Zacks Rank #1 and a VGM Score of A. Its earnings estimate for the current year has improved by 6.8% over the last 30 days. The stock has returned 16.1% over the last one year, outperforming the Zacks Rubber – Tires industry, which has gained 12.7% over the same period.
Fiat Chrysler is engaged in designing, engineering, manufacturing, distributing and selling vehicles and components and production systems.
Fiat Chrysler has a VGM Score of A. The company has expected earnings growth of 12.1% for the current year. Its earnings estimate for the current year has improved by 15.9% over the last 60 days. The stock has returned 41.8% over the last one year, outperforming the Zacks Automotive - Foreign industry, which has gained 5.8% over the same period. The stock has a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
SPX Corporation (SPXC - Free Report) is a provider of technical products and systems, industrial products and services, service solutions and vehicle components.
SPX Corp has a Zacks Rank #2 (Buy) and a VGM Score of A. The company has expected earnings growth of 5.4% for the current year. Its earnings estimate for the current year has improved by 3.3% over the last 30 days. The stock has returned 78.9% over the last one year, outperforming the Zacks Automotive - Replacement Parts Market industry, which has gained 3.5% over the same period.
Honda Motor Co., Ltd. (HMC - Free Report) is a leading manufacturer of automobiles and the largest producer of motorcycles in the world.
Honda has a Zacks Rank #2 and a VGM Score of B. The company has expected earnings growth of 66.5% for the current year. Its earnings estimate for the current year has improved by 2.2% over the last 30 days. The stock has returned 12.3% over the last one year, outperforming the Zacks Automotive - Foreign industry, which has gained 5.8% over the same period.
Will You Make a Fortune on the Shift to Electric Cars?
Here's another stock idea to consider. Much like petroleum 150 years ago, lithium power may soon shake the world, creating millionaires and reshaping geo-politics. Soon electric vehicles (EVs) may be cheaper than gas guzzlers. Some are already reaching 265 miles on a single charge.
With battery prices plummeting and charging stations set to multiply, one company stands out as the #1 stock to buy according to Zacks research.
It's not the one you think.
See This Ticker Free >>