The Zacks Automotive – Foreign industry is likely to see a mixed outlook in the coming months. In Europe, registrations are rising, but the growth now comes from electrified vehicles, which are displacing petrol and diesel models rather than simply adding to sales. China’s domestic market is in sharp decline, with weak consumer spending and a property slump hurting demand, while exports and a rising NEV share offer some support. Japan is growing modestly, helped by tax changes and cleared order backlogs, though forecasts point to a softer 2026 and 2027. Overall, automakers are likely to operate in an uneven demand environment, with growth varying sharply by region.

Against this backdrop, Toyota Motor (TM Quick QuoteTM - Free Report) , Honda Motor (HMC Quick QuoteHMC - Free Report) and Polestar Automotive (PSNY Quick QuotePSNY - Free Report) stand out for their electrified offerings and are worth buying now.

Industry Overview

Companies in the Zacks Automotive – Foreign industry are involved in the design, manufacture and sale of vehicles, components and production systems. The industry is highly dependent on business cycles and overall economic conditions. China, Japan, Germany and India are among the leading automotive manufacturing countries. The widespread adoption of advanced technologies is reshaping the industry, while stricter emission and fuel-efficiency norms, expanding charging infrastructure and supportive government policies are driving the adoption of green vehicles. As automakers intensify their electrification efforts, competition continues to increase. Companies are also investing heavily in the research and development of electric and autonomous vehicles, fuel-efficient technologies and low-emission solutions.

Key Investing Themes

Europe’s Electrified Vehicles Now Drive the Market: Europe’s car market is growing despite a tough backdrop. According to European Automobile Manufacturers’ Association, new passenger car registrations in the EU rose 5.7% year to date to about 8.52 million units, even as energy prices kept climbing and geopolitical tensions weighed on sentiment. The growth is coming almost entirely from electrified vehicles. Hybrids are the most popular choice among buyers, while battery-electric cars hold 22.7% of the market and plug-in hybrids 10.1%. Government buyer incentives and a wider range of models are helping sustain this demand, especially in the larger European economies. Electrified cars are no longer a side segment adding to sales; they are taking share from petrol and diesel models. As this momentum continues, a carmaker’s standing in Europe will depend largely on how strong its electrified line-up is.

China’s Exports Cushion a Weak Home Market: China’s domestic car market is under heavy pressure. Per China Passenger Car Association, September passenger vehicle sales dropped 28.1% year on year to 1.63 million units, the 12th straight monthly fall and a sharper slide than August’s 23.7%. Weak consumer spending and a long property slump are the main reasons. Retail sales for the first nine months fell 22% to 13.33 million units against growth of over 9% a year earlier. Two things are still supporting the industry. Exports are growing as automakers look abroad, and new energy vehicle sales are climbing. New energy vehicle sales reached a record 66.5% of total vehicle sales in September. Forecasts remain cautious. The CPCA expects domestic sales to fall about 22% to 18.5 million in 2026, then recover by a modest 2% in 2027 as short-term pressures fade, costs ease and products improve.

Japan’s Growth Modest but Outlook Soft: Japan’s vehicle market is growing slowly but steadily. Per Just Auto, in the first nine months of the year, sales rose 2.3% to about 3.55 million units, following a 5% gain a year earlier. Passenger vehicles grew 1.3% to 2.96 million, while trucks did better, up 7.4% to 574,606 units, led by a 12% jump in light trucks. Two factors have supported demand over the last five months— the end of the prefectural Environmental Performance Tax in March, and manufacturers clearing their order backlogs. Consumer sentiment is also improving as household incomes rise, offsetting interest rate hikes and higher living costs. That said, GlobalData expects light vehicle sales in the country to slip 1% to 4.47 million units in 2026, then fall a further 4% to 4.32 million in 2027.

Zacks Industry Rank Is Encouraging

The Zacks Automotive – Foreign industry within the broader Zacks Auto-Tires-Trucks sector currently carries a Zacks Industry Rank #101, which places it in the top 41% of more than 245 Zacks industries.

The group’s Zacks Industry Rank, which is the average of the Zacks Rank of all the member stocks, indicates a strong near-term outlook. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1. The industry’s positioning in the top 50% of the Zacks-ranked industries is a result of a positive earnings outlook for the constituent companies in aggregate.

Before we present a couple of stocks that are worth adding to your portfolio, let’s look at the industry’s recent stock market performance and current valuation.

Industry Lags Sector & S&P 500

The Zacks Automotive – Foreign industry has underperformed the Auto, Tires and Truck sector and the Zacks S&P 500 composite over the past year. The industry has lost 23.6% compared with the sector’s decline of 11.7%. The S&P 500 has risen 11%.

One-Year Price Performance

Industry's Current Valuation

Since automotive companies are debt-laden, it makes sense to value them based on the Enterprise Value/ Earnings before Interest Tax Depreciation and Amortization (EV/EBITDA) ratio.

Based on the trailing 12-month enterprise value to EBITDA (EV/EBITDA), the industry is currently trading at 10.96X compared with the S&P 500’s 17.65X and the sector’s 25.3X.

Over the past five years, the industry has traded as high as 12.73X, as low as 6.97X and at a median of 9.52X, as the chart below shows.

EV/EBITDA Ratio (Past Five Years)

3 Stocks to Buy

Honda, Japan’s leading automaker, has an encouraging outlook backed by strong hybrid demand, a profitable motorcycle business and growing Financial Services earnings. Hybrids should remain a key growth driver, especially in North America, where demand and profitability compare favorably with EVs. At the same time, Honda is building for the longer term through its 0 Series EVs, battery partnerships and a planned 40-GWh joint venture with LG Energy Solution. This gives it EV upside while letting it profit from hybrids today.

The motorcycle business adds stability. It serves broad demand across large emerging markets and earns high margins, giving Honda a recurring source of income while the auto division absorbs restructuring and electrification costs. Overall, this diversified earnings base and balanced electrification approach make the risk-reward look attractive.

HMC currently sports a Zacks Rank #1 (Strong Buy). The Zacks Consensus Estimate for Honda’s fiscal 2027 and 2028 EPS implies year-over-year growth of 209% and 59%, respectively.

You can see the complete list of today’s Zacks #1 Rank stocks here.

Price & Consensus: HMC

Toyota, Japan’s largest automaker, is well placed to benefit from the rising demand for hybrids. The company expects hybrid sales to climb to 5.09 million units in fiscal 2027 from 4.62 million in fiscal 2026, and it plans to add more capacity ahead of 2030. To support this, Toyota will upgrade battery lines that serve about 600,000 vehicles to next-generation technology during 2027-2028. The aim is better performance and lower costs, which should help it stay competitive as electrified vehicles take a bigger share of sales.

Its value-chain businesses, such as financing and connected services, add a steady stream of recurring earnings and reduce reliance on vehicle sales alone. Near-term prospects also look firmer. Toyota raised its fiscal 2027 consolidated sales forecast by 100,000 units to 9.70 million, citing demand in Europe and alternative logistics routes to the Middle East. Manufacturing expansion in key markets further backs its growth outlook.

Toyota currently carries a Zacks Rank #2 (Buy). The Zacks Consensus Estimate for TM’s fiscal 2027 and 2028 EPS implies year-over-year growth of 3.5% and 15%, respectively.

Price & Consensus: TM

Polestar, a Sweden-based EV maker, had a record first half of 2026, supported by its shift to a retailer-led sales model and a growing retail network across its markets. The Polestar 4 coupe, its best seller, makes up most of the volume, and Europe remains the core region. Operations are improving. Cost discipline has lowered administrative spending, and a richer mix of higher-margin Polestar 4 cars is helping profitability.

The balance sheet is also stronger. Polestar has raised fresh equity, converted a large part of its shareholder loans into equity and extended the maturity of Volvo Cars’ remaining loan to 2031. Lower capital spending should also help reduce cash burn in the second half. New launches add momentum. The Polestar 4 SUV, aimed at a larger and growing segment, will begin deliveries in the fourth quarter, and Polestar 5 deliveries are about to start.

Polestar currently carries a Zacks Rank #2. The Zacks Consensus Estimate for PSNY’s 2026 and 2027 bottom line implies year-over-year improvement of 53% and 2.5%, respectively.

Price & Consensus: PSNY