Major U.S. stock indices have witnessed record highs in 2019 and appear poised to maintain their bull run in 2020 as well. The S&P 500 Index, which closed at another fresh high of 3,224.01 in yesterday’s trading session, has roughly increased 29% on a year-to-date basis and is headed for its biggest annual gain since 2013.
Preliminary U.S.-China trade truce over import duties, mild relaxations in Brexit uncertainty and the Federal Reserve’s three consecutive rate cuts provided a boost to the S&P 500, pushing it to fresh record highs in consecutive sessions.
While the S&P 500 is notching all-time highs and is up for a record-setting 2019, the auto sector has trailed the index so far this year. Year to date, the sector has gained 18%, underperforming the S&P’s rally.
With just a few days left before we ring in the New Year, it seems to be the right time to reflect on how the auto sector has fared so far in 2019 and the way it’s poised for 2020.
Auto Sector Lags S&P 500 in 2019 Amid Headwinds
The auto sector, being consumer cyclical, is dependent on business cycle and economic conditions. While the U.S. economy is growing at a steady pace, many emerging economies like Brazil, India and China, among others, snagged in the slowdown. This has weighed on the auto sector. Dwindling vehicle sales, fierce industry competition, trade tensions, mounting production, and R&D costs for shift toward electric and autonomous future are keeping margins under pressure for automakers.
A study by Fitch Ratings claims that global car sales are anticipated to fall around 4% year over year in 2019, marking the biggest decline since 2008. Declining sales in China, which is the world’s largest auto market, is the key factor to impact the worldwide demand of car sales. Carmakers in China, which are battling an unprecedented slump amid economic slowdown concerns, are expected to witness a second straight annual drop in vehicle sales in 2019. New emission standards, weak credit growth, and rise in ride-sharing services and used car sales are weighing on the demand for new vehicle sales. Sales in the United States are witnessing a declining trend and vehicle sales are expected to drop 2% year over year in 2019, per Fitch Ratings. Year-to-date vehicle sales in Brazil, Russia and India have declined 5.5% year over year.
A shift toward electric and self-driving vehicles has made it necessary for automakers to reorient their business model. Technological development with regard to electric, autonomous and connected cars demand huge investment, and even the auto biggies are struggling to generate solid margins amid high capex.
Plagued by the headwinds, the auto sector’s 2019 earnings are expected to decline 13.2% year over year, per the latest Earnings Trends report.
Will Auto Sector Improve in 2020?
The U.S.-Sino trade tensions, which had been building pressure on automakers for long, are now abating, as the countries have reached a preliminary agreement. Improving domestic economy, rising wage growth and low unemployment levels are expected to provide some respite to the sector in the New Year.
However, certain challenges will prevail. Notably, Fitch Ratings does not expect any sharp rebound in auto sales in 2020 either.
Importantly, car companies have to develop and upgrade their offerings to remain on par with the evolving trends in the automotive market. All these challenges require increased research & development (R&D) spending to design innovative products, as well as set up production lines to manufacture the same. Considering the changing dynamics, strategic alliances among automakers are likely to gather steam in the upcoming year to effectively share R&D costs to fund new technologies. The recent Fiat Chrysler (FCAU - Free Report) -PSA Groupe merger deal is likely to herald further tie-ups in the near future.
From a future competitive standpoint, carmakers will have to balance revenue generation with broader challenges and escalating expenses. Eventually, the sector’s success will depend on how well the players manage escalating costs incurred for mass manufacturing and evolving technology.
Despite the sector’s challenging backdrop, some auto companies have emerged as winners and returned more than double of the S&P 500 year to date. These stocks look poised to continue the winning spree.Here, with the help of the Zacks Stock Screener, we’ve handpicked three auto stocks that carry a Zacks Rank # 1 (Strong Buy) or 2 (Buy). Backed by healthy fundamentals, these stocks boast immense upside potential and are likely to beat the market in the future amid precarious market conditions.
Spartan Motors, Inc. (SPAR - Free Report) : The Charlotte, MI-based company develops, assembles, and sells heavy-duty trucks and vehicles in the United States and international markets. The Zacks Rank #2 firm has a market cap of around $620 million and its shares have increased 146.3% in the year-to-date period. The bottom line is expected to grow 85.4% and 4.5% year over year in 2019 and 2020, respectively.
Weichai Power Co Ltd. (WEICY - Free Report) : This China-based firm produces engines, heavy and light vehicles, construction machinery, hydraulic products, automotive electronics and related parts. The Zacks Rank #1 firm has a market cap of around $15.5 billion and its shares have increased 73% in the year-to-date period. The bottom line is expected to grow 85.4% in 2019.You can see the complete list of today’s Zacks #1 Rank stocks here.
Westport Fuel Systems Inc. (WPRT - Free Report) : Canada-based Westport Fuel Systems Inc. is a developer, manufacturer and supplier of advanced alternative fuel systems and components. The Zacks Rank #2 firm has a market cap of around $332 million and its shares have increased 85.7% in the year-to-date period. The bottom line is expected to grow 103% and 1,100% year over year in 2019 and 2020, respectively.
Zacks Top 10 Stocks for 2020
In addition to the stocks discussed above, would you like to know about our 10 top tickers for the entirety of 2020?
These 10 are painstakingly hand-picked from over 4,000 companies covered by the Zacks Rank. They are our primary picks to buy and hold.
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