By Nancy Zambell
Editor, Investment Digest
and Dividend Digest
Car Sales are Up and so are Auto Stocks
For Excitement, there's Tesla (TSLA)
Two Reasons for Auto Supply Stocks to Rise
With the economy back on track, the auto manufacturing group is performing very well. In the U.S., car sales are up almost 17% year-over-year, and truck sales have risen 3% during the same period. Worldwide, auto sales are expected to reach 72.23 million units this year, an increase of 5.2%.
Those sales figures have driven stock prices higher in most of the major auto companies (Honda being the exception), as you can see from the following charts from Yahoo!Finance.
But Tesla Motors (TSLA) has truly been the standout!
Just in the past 12 months, Tesla's shares have risen 402% and are up 724% in just two years! The question on the minds of Tesla investors-as well as potential Tesla investors-is how much longer can it last? I don't have an answer for you, as the stock is driven by incredible momentum-not earnings, the usual primary driver of share prices. And as long as the trend continues, so can the upward momentum in the stock.
Tesla is certainly an exciting stock, and for investors who can stomach the risk, it would be a lot of fun to own.
But it's not for everyone. All investors are looking for great gains, but many want a more conservative investment strategy. They like companies that have a proven track record of growing sales and earnings, reasonable debt, good cash flow and rising market share. But they also know that those fundamentally strong companies need a catalyst that will move their shares higher-30%, 50% or even double.
Today, that catalyst is the recovering economy, and many sectors are poised to benefit for the next few years, as economic expansion continues. The automakers have had a good run, and will most likely continue on an upward trajectory-although less strongly as the recovery stabilizes-for the foreseeable future. But a related industry-automobile suppliers-have also done well, and I think they may have a lot more room to run.
Our Investment Digest has had some great winners in this arena. John Gray of Investor's Intelligence picked Borg Warner (BMA) in August 2011-and shares are up 76% since that time. In August 2012, Richard Moroney of Dow Theory Forecasts recommended Advanced Auto Parts (AAP)-the stock has risen 92% since then. And in April 2013, John Reese of Validea Hot Lists, selected Lear (LEA), whose shares have increased 94%.
I don't think the trend is finished, for two good reasons:
* The recovering economy will continue boosting new car sales.
* In 1995, the average vehicle age in the U.S. was 8.4 years; today it's 11.4 years.
* Consequently, the older the car, the more parts it will need.
Demand for auto supplies has ratcheted industry sales up from $120 billion in 2007 to an estimated $146 billion by next year.
With that in mind, I took a look at the industry and found three companies that appear to have excellent potential to continue rising.
Douglas Dynamics (PLOW), which manufactures snow and ice control equipment for light trucks
* Beat earnings estimates: $0.43 estimated vs. $0.64 actual
* Estimates revised upward from $0.22 a share 30 days ago, to $0.31
* 23 new institutions in the stock, adding 539,747 shares
* 5.10% dividend yield
China Automotive Systems (CAAS), which manufactures automotive steering systems and components
* Beat earnings estimates: $0.22 estimated vs. $0.39 actual
* Estimates revised upward from $1.06 a share 90 days ago, to $1.18
* 10 new institutional investors, buying 195,678 shares
Motorcar Parts of America (MPAA), which manufactures automotive aftermarket parts, including alternators, starters and wheel hub assembly products.
* Beat earnings estimates: $0.25 estimated vs. $0.30 actual
* Estimates revised upward from $1.97 a share 90 days ago, to $2.00
* 28 new institutions in the stock, for 1,010,259 shares
Shares of all three are a bit volatile, but I think we can expect volatility to be with us for the next couple of years. However, the trend is up for each company, and one or more of them may make nice additions to your portfolio.
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Nancy Zambell Editor of Investment Digest and Dividend Digest