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Auto Stocks: An Investor's Dream or a Nightmare?

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Welcome to Episode #92 of the Zacks Market Edge Podcast.

Every week, host and Zacks stock strategist, Tracey Ryniec, will be joined by guests to discuss the hottest investing topics in stocks, bonds and ETFs and how it impacts your life.

In this episode, Tracey is joined by David Bartosiak, Editor of Zacks Momentum Trader and Home Run Investor as well as host of Zacks Live Trader on YouTube, and Eric Vizinas, Zacks Studio Manager, to discuss what is going on in the auto industry in 2017.

Are You Buying a Car in 2017?

Eric joins the discussion because he is actually in the market to buy a new car. But he’s had an interesting experience with the Chicago area auto dealerships. Let’s just say they’re very eager right now to make a sale. He explains.

July auto sales in the United States weren’t great. Inventory remains a problem which is leading to work slowdowns and furloughs at factories while the dealers try and move the old merchandise.

American demand has peaked around 17 million cars. Many experts expect it to remain between 16 and 17 million over the next few years. In other words, they don’t see a significant slowdown. It will be more like treading water.

What does that kind of market mean for investors?

The Auto Makers Are Cheap

There’s no doubt that the auto manufacturers have cheap valuations.

1.       General Motors (GM - Free Report) is trading with a forward P/E of just 5.8 and pays a dividend yielding 4.2%.

2.       Ford (F - Free Report) has a forward P/E of 6.7 and is paying a dividend yielding a juicy 5.4%.

Is this a buying opportunity in the auto makers?

Are the Dealerships the Way to Go?

The dealers are more diverse than the auto makers. They sell new and used cars as well as handle parts and services. That means they have various forms of revenue streams.

Lithia Motors (LAD - Free Report) , for example, had solid numbers in its parts and services division in the second quarter even as auto sales slowed. Parts and Service revenue was up 7.1% with its body shops seeing a gain of 10%.

There are 3 other big auto dealers that also compete in the US, and globally, with exposure to Brazil and the United Kingdom.

They’re all cheap, with forward P/Es under 13.

Should investors be looking at the dealers right now?

Look for Niche Businesses

If you’re seriously considering investing in the auto stocks, Dave thinks going “niche” is the way to go.

1.       CarMax (KMX - Free Report) specializes only in used cars. It’s expected to see double digit earnings growth this fiscal year.

2.       Ferrari (RACE - Free Report) is trading with a forward P/E of 39 but it’s not like other car companies. Dave waxes poetically about what makes Ferrari different from the mass market auto makers. Shares have soared, however. But is it too late to get in?

What else should you know about the auto stocks?

Find out on this week’s podcast.

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