Among the many features found in each week’s edition of Value Line’s Selection & Opinion is a list of the seven best and worst performing industries over the past six weeks. These rankings can be found on the inside back cover of Selection & Opinion. The roughly 1,700 stocks in the Value Line universe are currently divided up among about 100 industries. Notably, for the purposes of calculating these results, the performance of each stock is equally weighted to the others in its industry (i.e., irrespective of market capitalization). This data also forms the basis for the Relative Strength price charts found on each industry page in The Value Line Investment Survey.
The broader market continues to make impressive strides early in 2012, as indicated by the 8.6% advance in the Value Line Geometric Average over the six weeks ending February 21st. In this setting, cyclical industries have dominated the best-performing list. With a gain of 19%, Metal Fabricating led the way in our latest rankings, while Automotive (up 17%), Heavy Truck & Equipment (16%), and Homebuilding (15%) also claimed spots in our top seven. At the other end of the spectrum, we see that the advance in equity prices over the past six weeks has largely bypassed utilities stocks. The Electric Utility (West), Electric Utility (East), Electric Utility (Central), and Natural Gas Utility industries have all essentially tread water over this stretch, putting them among the seven worst-performing groups that we follow.
Using the best-performing list as a jumping off point, we are taking a closer look at the Automotive Industry this week. As was the case in many of the industries now near the top of industry price performance rankings, automotive stocks were largely out of favor in 2011. Of late, though, investors have become increasingly comfortable with more cyclical groups, likely reflecting easing concerns on various fronts: the sovereign-debt crisis in Europe, the uneven pace of economic growth in the United States, and the signs of deceleration in the emerging-market juggernaut, China. With respect to auto stocks, this increased appetite for risk has likely been whetted by favorable data on U.S. light vehicle sales. The seasonally adjusted annual sales rate picked up in the opening month of 2012, climbing from 13.6 million vehicles in December to 14.2 million in January.
The recent surge in support for automotive stocks essentially lifted all boats. Ford (F) stock was the comparative laggard. Despite a cool reception to the company’s fourth-quarter results—earnings came in $0.07 a share below our estimate—the Detroit automaker’s shares rose roughly 5% in the six weeks under review, performing nearly as well as the broader market.
The rest of the group, meanwhile, registered considerably stronger gains. Tata Motors (TTM) set the pace, its shares soaring nearly 40%. December-quarter results at the Mumbai, India-based automaker, including sales and operating income growth of 44% and 52%, respectively, no doubt helped to fuel the market’s enthusiasm for this equity. Toyota (TM), Daimler (DDAIF), and Telsa Motors (TSLA) also enjoyed 20%-plus increases in their stock prices.
Investors taking a look at the group will likely note that, as industries go, the automakers are a fairly homogenous group. From an operating perspective, all of these companies are essentially in direct competition with each other, selling similar products in many of the same markets. In addition, the fortunes of each automaker are closely tied to the cyclical swings of the broader economy. During the last recession, new vehicle sales fell sharply in many key markets, including the U.S., pushing the industry as a whole into the red.
Automotive stocks also tend to have similar investment attributes. Even with the recent surge in prices, many of these equities still trade at single-digit P/E multiples. This is not out of character, likely reflecting the industry’s susceptibility to wide cyclical swings. Still, we think risk-tolerant investors seeking above-average total returns to 2015-2017 will find the current valuations for many of the auto stocks to be compelling. Granted, at current levels, U.S. industry sales are already well above the lows of the most-recent recession (about 9 million on an annualized basis). Nonetheless, we think there is room for good upside ahead, considering that for most of the previous decade annual sales in excess of 17 million were the norm. Elsewhere, emerging markets also offer the potential for considerable growth in the years ahead.
Automotive stocks are generally best suited for investors with a healthy appetite for risk. The descent of the U.S.’s largest automaker, General Motors (GM), into bankruptcy during the last recession provides a still-fresh reminder of the potential downside to an investment in this cyclical industry. Those investors on the conservative side will likely feel most comfortable with the Japanese carmakers. Honda (HMC) is the only stock in the group with an Above-Average rank for Safety. Shares of Nissan Motor (NSANY) and Toyota Motor are only Average selections for Safety, but do get relatively high marks for Price Stability.
On the other hand, particularly venturesome investors may wish to look under the hood of Tesla Motors. The company only went public in 2010 and is likely to ring up sizable operating losses for at least another year as it seeks to carve out a niche in the electric-vehicle market. Though still quite speculative, this green-technology business model looks to have the potential to produce sizable share-price appreciation for patient, risk-tolerant investors.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.