5 Stock Alternatives With Which to Play the Automotive Sector
If you were a prudent enough investor to buy into the auto companies throughout the financial downturn, chances are you made a decent amount of money as the sector recovered and moves along at a rapid clip. In the shorter run, investing in companies like General Motors (NYSE:GM), Ford (NYSE:F), or Toyota (NYSE:TM) can make for smart investments, provided you have a degree of confidence that the economy as a whole will remain strong enough to support growth in this sector.
Auto sales can sometimes be quite fickle. Unusual weather patterns — like we saw earlier this year — can have a profound effect on peoples’ ability to make it to their local showroom, and thus make or break the company’s month, quarter, whatever. Similarly, public reception to a new vehicle will also have a profound effect if it either goes over too well (resulting in supply issues) or doesn’t fall within public favor (results in demand issues).
Overall, compared to many industries, investing in auto manufacturers is a relatively safe place to do business. But there are ways to play that field that are arguably even more safe than betting on the whims of public spending on such goods. The First Trust NASDAQ Global Auto Index is an ETF that holds positions in everything from General Motors to Harley Davidson, with weightings ranging from 0.09 percent (in Korean company SsangYong) to more than 8 percent (Ford).
One could also go the supplier route, too. This strategy allows investors to take advantage of surging auto sales, but with a little less skin in the game than when compared to the automakers themselves. The largest suppliers provide parts to numerous automakers, so the risk associated with one company is limited.
Here’s an assortment of stocks that offer an alternative play to investing directly in the automotive sector without being on the front lines of auto manufacturing and sales. This list is not intended to be comprehensive (you can check out this list for that), so if you think we forgot something important, let us know in the comments below.
1. Johnson Controls (NYSE:JCI)
Johnson Controls is perhaps less known than the supplier powerhouses that are Bosch, Siemens, or Delphi, but it is nonetheless a crucial cog in the automotive supply system. The company specializes in automotive-related electronics, seats, interiors, and batteries (both conventional and hybrid-electric), and outside of the automotive circles, it dabbles in industrial refrigeration, real estate management, and more.
As vehicle safety standards become more stringent, it’s companies like Johnson Controls that are finding themselves charged with advancing the technology needed to make the cabin of a car as safe as it can be. Regardless of what changes in the future for automotive design, seats and interiors will remain constant in that they will always be needed. Johnson has the advantage of catering to several large companies, so the risk of putting too many eggs in one basket is low. So far this year, Johnson’s stock is down by about 2.44 percent, creating a buying opportunity for those who see long-term potential in the company. The stock is up north of 33 percent over the past year.
2. Continental AG (ETR:CON)
Continental AG is arguably best known for its tires, but the company is about much more than that. Continental, or Conti, for short, also makes washer systems, braking systems, safety sensors, driver assistance setups (like adaptive cruise control and blind spot detection), hybrid systems, fuel supply, transmissions, and on and on and on.
Continental, which is based in Germany, has been riding the automotive boom over the past couple of years, and this year so far, its shares are up nearly 10 percent. More impressively still, Conti’s shares are up more than 70 percent over the past 12 months, and the stock is within 10 euros of its 52 week-high. Nonetheless, the company likely still has some fight in it, as the European auto market is still in recovery mode and the market for Conti’s high-tech systems is still far from saturated.
3. First Trust NASDAQ Global Auto Index (NYSEARCA:CARZ)
The First Trust Global Auto Index is an ETF carrying most, if not all, of the major automakers around the globe in its holdings. Its most heavily weighted stock is Ford, which accounts for about 8.5 percent of the portfolio, and is followed by Mercedes-Benz parent Daimler (DDAIF.PK) in second and General Motors in third. Toyota and Honda (NYSE:HMC) round out the fourth and fifth most heavily weighted stocks, respectively, while South Korea’s SsangYong is the least weighted stock.
The advantage to an ETF is that it’s invested in the automakers directly, but the exposure to one or another is never too risky in the event that things head south. Generally, for an ETF to suffer, the industry as a whole has to be doing pretty poorly, or it’s subjected to ineffective or poor weighting strategies. The Auto Index is so far up a modest 2 percent or so, a sort of hangover after its nearly 15 percent run-up over the past year. After a stellar 2013, automakers are expecting a calmer year in 2014, but the post-financial crisis momentum isn’t likely to abate quite yet.
4. Denso Corp. (DNZOY.PK)
Japanese component supplier Denso has enjoyed — and still enjoys — an illustrious racing career, from rally to Le Mans-spec events. Denso is an Original Equipment Manufacturer (OEM) that produces engine management systems, diesel fuel injection systems, hybrid and EV components, electrical equipments, cooling systems, windshield wipers, windshield washers, horns, blinkers, navigation systems, and a whole lot more. The company also has a lucrative aftermarket parts business, too.
However, Denso shares are down about 13 percent so far this year, conceivably allowing for a good entry point for interested investors. The slide represents a cooling-down period, as the shares are still up more than 20 percent over the past year. Currently, Denso shares are trading at around 4,800 yen (about $46.82), or halfway between the company’s 52-week range of 3,905 to 5,799.
5. Delphi Automotive (NYSE:DLPH)
Delphi, like Denso, is an England-based major OEM supplier for numerous automakers, including GM, and focuses largely on electronic components like driver interfaces, hybrid and fuel cell components, security systems, infotainment, sensors, transmission management systems, and so much more. The company was in headlines most recently for being the supplier of the faulty General Motors ignition switch, though in its defense, it had warned GM’s engineers that the part ordered was not up to their desired specs.
Delphi has enjoyed a strong 2014 so far, with its shares up over 16 percent. For the year, the stock has seen growth of more than 38 percent, and the company has shown indication that it’s continuing to pick up market share. At about $70, Delphi is trading just below its 52-week high of $71.27, though with numerous new model cycles scheduled over the next couple of years, the demand for Delphi’s products is likely to continue to increase.