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Autos Power Industrial Production Higher: 5 Picks

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Industrial production experienced its first gains for the year in May. A spurt in motor vehicles and parts output was the highlight of this report. Not only did this propel the headline manufacturing numbers, it also helped offset the negative impact of the decline in production of metals and aerospace equipment.

Additionally, auto stocks recently received a major reprieve when President Trump decided to indefinitely delay his tariffs on Mexican imports. Nearly every American auto factory is heavily dependent on parts from that country.

The threat of tariffs on Europe remains, but some economists believe that this could actually boost sales of cars made in the United States. This is why it’s a great time to invest in U.S. stocks of autos and related parts.

Largest Increase in Six Months

In May, industrial production increased by 0.4%, exceeding the consensus estimate of 0.2%. This was the metric’s largest increase in six months and the first for 2019. Capacity utilization came in at 78.1, marginally higher than the projected level of 78.

Gains were largely broad-based with motor vehicles and parts production leading the charge with a 2.4% increase. Close behind was the volatile utilities category with a gain of 2.1%. This was largely due to higher purchases of air conditioners, an outcome of unusually warm weather. Mining output increased 0.1%.

Other categories registering increases last month include business equipment, consumer goods, nonindustrial supplies and materials output. The broad-based nature of gains helped negate the impact of a few errant categories such as primary metal production, which declined by 1.9%. Output of fabricated metals products moved 0.1% lower.

Autos Power Headline Number, Retail Sales

However, the focus remained squarely on autos with light truck assemblies increasing to an annualized pace of 8.43 million, significantly higher than April’s level of 7.84 million. Auto assemblies increased from 2.44 million to 2.56 million.

This doesn’t come as a major surprise since auto purchases also propelled retail sales higher in May. Auto sales registered a strong rebound last month, gaining 0.7% after registering a decline of 0.5% in April.

A jump in sales is also a likely consequence of the Big Three, General Motors (GM - Free Report) , Ford Motor Company (F - Free Report) and Fiat Chrysler Automobiles (FCAU - Free Report) ramping up production of pickup trucks. The demand for larger and heavier vehicles has increased in recent years, thanks to falling gasoline prices.

Trump’s Call to Delay Mexico Tariffs a Major Positive

On Jun 7, President Trump tweeted that he was suspending his plans to impose tariffs on Mexico “indefinitely.” He also stated that Mexico had agreed to take strict measures to stop such immigration and work toward stemming the “tide of Migration through Mexico, and to our Southern Border.”

Trump’s decision was warmly welcomed by U.S. automakers. The importance of access to auto parts and accessories made in Mexico for the U.S. auto industry cannot be stressed enough. The proposed 25% tariff on Mexican imports would raise the cost of completed vehicles and parts by nearly $28 billion a year.  

Our Choices

The auto sector is hugely responsible for the improvement in industrial production in May. The sector also powered the spurt in retail sales last month. Trump’s decision to delay tariffs on Mexican imports is a major positive for the sector.

Investing in auto stocks looks like a smart choice now. 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, each of which has a Zacks Rank #2 (Buy) and good VGM Score. You can see the complete list of today’s Zacks #1 Rank stocks here.

Ford designs, manufactures, markets and services cars, trucks, sport utility vehicles, electrified vehicles and Lincoln luxury vehicles.

Ford has a VGM Score of A. The company’s projected growth rate for the current year is 6%. The Zacks Consensus Estimate for the current year has improved by 14% over the past 60 days.    

Cummins Inc. (CMI - Free Report) is a leading global designer, manufacturer and distributor of diesel and natural gas engines and powertrain-related component products.

Cummins has a VGM Score of A. The company’s projected growth rate for the current year is 22.7%. The Zacks Consensus Estimate for the current year has improved by 0.3% over the past 30 days.    

Allison Transmission (ALSN - Free Report) is a designer and manufacturer of fully-automatic transmissions for medium and heavy-duty commercial, and heavy-tactical U.S. defense vehicles.

Allison Transmission has a VGM Score of A. The Zacks Consensus Estimate for the current year has improved by 2.4% in the last 60 days.  

Meritor, Inc. (MTOR - Free Report) is a global automotive parts manufacturer and supplier.

Meritor has a VGM Score of A. The company’s projected growth rate for the current year is 16.7%. The Zacks Consensus Estimate for the current year has improved by 5.4% over the past 60 days.  

PACCAR Inc. (PCAR - Free Report) is a leading manufacturer of heavy-duty trucks in the world and has substantial manufacturing exposure to light/medium trucks.

PACCAR has a VGM Score of B. The company’s projected growth rate for the current year is 7.7%. The Zacks Consensus Estimate for the current year has improved by 0.2% in the past 30 days.    

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