The auto sector has looked more like a junkyard than a showroom over the past few years. Baird analyst David Leiker believes he has found a couple of diamonds in the rough.
Some stocks perform better than others, and given that stocks are grouped into sectors, some sectors perform better than others do. The auto sector is definitely not one of the ones that people like, and they haven’t liked this sector for a long time in fact.
In a sector this beat up, the most that people have had reason to hope for lately is not losing too much money on auto sector stocks. GM, for instance, is only down 1% year over year, and was actually up a bit at several times in 2019. This does not make GM an exciting stock by any means, or anything that anyone would have wanted to own over this period, or over the 9 years that it has been listed in its current incarnation after they were burned to the ground.
Holding GM stock for all this time would not have provided any capital gains, although you at least got to keep their dividends, but that only amounts to chicken feed given that the average stock has tripled in value since.
Ford is also down year over year and is down 28% over the last 9 years, and this offers us an even worse comparison compared to the average. If we are looking to pick stocks though, we shouldn’t be shooting for just average ones because we could get that just by investing in index funds. When the average stock beats the crap out of our picks though, and we insist on sticking with them through very little thick and a whole lot of thin, we need to hang our heads for sure.
People will amusingly blame the stock for these things though, when it should be clear that they shoulder the entire blame here, and need to realize and accept this or they will never learn. More and more people caught on to this rotting of this sector and finally did the right thing, but this has made things even worse for those still sticking around.
GM and Ford are among the cream of the crop here, believe it or not, and when we look at an ETF that tracks the auto sector, the First Trust Nasdaq Global Auto Index, we see an even uglier story being told. It is down almost 20% this year, and we know how good a year this has been for stocks thus far.
The stock market is in some ways like a big city, which has its various districts of various qualities, and also has its slums. The auto sector is clearly located in the slums, and has been there for years with only distant hopes of relocating to a better part of town.
Stocks in a particular sector do move together, and aside from the fact that stocks generally move together anyway, the business environment in a given sector will apply in a meaningful way to all stocks in the sector. Some will outdo others of course, perhaps shining a little more among the junk, but when the weather is bad, this will still tarnish them, to a lesser degree perhaps.
Baird Analyst Finds Two Auto Stocks He Likes
Investment firm Baird has been around for a very long time and has seen the rises and falls of the auto industry since the days of the Model T. Baird analyst David Leiker has been combing through the auto sector junkyard and believes that he has found a couple of gems that are worthy of his clients actually buying.
For a stock to be worth investing in, it’s not enough that it has potential, its potential must be well above average for individuals to be able to get excited at all about it. Without even looking at his picks, we might already be very skeptical about whether such a thing exists these days, an auto stock that can go head to head with the best in the stock market and compete.
This might be akin to looking to bet on horses that have a big ball and chain tied to them, and the ball and chain here is sector performance. Others in better sectors without this handicap should be able to outrun any horse that has to drag this around the track, but nonetheless, we have to keep an open mind because, as they say, anything is possible.
The two stocks that Leiker really likes are Visteon Corp and Aptif PLC. These are far from household names so we know that he dug deep into the junk pile in his search at least.
The first thing we want to ask is how the stocks have been performing. We are going to want to see some better numbers than the auto ETFs have shown us, much better ones, because we don’t want to be betting money on a horse that is far behind the pack. This means our horse hasn’t run very fast at all lately and we will need to see the horse at least make a break and pick up speed before we will ever want to think of placing a bet on it.
It might be that some miracle may come down from heaven, like a scene out of a movie, where the light shines on a stock and it starts magically taking off and getting everyone out of their seats in awe, but these are not things that we should not ever be putting our money on. If this did happen though, perhaps that would be the time, but prior to that, in the wishing and hoping phase, it just hasn’t proven itself.
There is a real lesson here that takes us well beyond the validity of these two picks, and it is that while it is fine to hope, we need evidence to back it up before we ever act upon this hope. Hope not only plays a role in people’s investing strategies, it is the primary factor or even the sole one in a lot of cases.
If we are hoping that a stock will go up, which includes all manners of what we may call analysis as well, and no one told the stock how good it is supposed to be doing, we need to wait until the stock starts understanding this before we should ever bet any money on it.
How a stock has done over the last year is a good place to start, for investors anyway. This might seem like a fairly long time and some might think that we should look at a much shorter period, but while that would be very appropriate for someone trading shorter term, investors look to hold for years and therefore a single year isn’t short at all.
If investors look to jump on the short-term moves, these moves produce sell signals far quicker than longer-term moves do. We at least need the current move to be sustained enough and if a stock gets hot, it’s 52-week performance will pick up soon enough.
We can use the 52-week performance of the S&P 500 as a benchmark, and as it turns out, it’s almost exactly where it was a year ago. Stocks that are up over the last year would be above average, and the more that they are up, the more above average they are. Stocks down over the last 52 weeks would be below average, and we can cut those out of the discussion just based upon this, even though the more that they have gone down, the worse they are, unless you have been shorting them that is.
These Two Stocks are on the Wrong Side of Terrible
Visteon has lost a whopping 43% over the last year, which means that this was found in the junkiest pile in the car sector junkyard. Its chart is simply ugly, and if was on the comeback trail we might want to have a second look at this, but it is currently off its 2019 high by 25% and does not show any real signs of getting even back there anytime soon.
If it did, this would be a play at a swing trader may be interested in, one that may bode well to knock off some pretty good returns over the next few months, but if you are instead looking to hold something like this for a few years, the trendline is pointing in the other direction in this case.
Aptif has at least done better than Visteon and has only lost 11% over the last year, but that’s far from what we should be looking at. It has been trading in a range over this time and doesn’t really show any signs of breaking out of it anytime soon.
Even if we’re investing for the longer-term, we still need to approach our entries sensibly. We may not want to hold them sensibly after we’re in, but we owe it to ourselves to at least make the first move with some regard to whether it may be a good time or not to enter.
Regardless of what we may believe the future may hold for these companies, they just aren’t showing us any reason why now would be the time, and if they continue to stink, they need to be allowed to that without our trying to ride their backs and being dragged through the mud as our reward.
Leiker likes Visteon because he feels that they have a competitive advantage in the auto instrumentation business. Whether this is true or not, it has not translated well to its stock price, and without this happening, this is not a meaningful distinction.
Leiker also seems to suggest that he is made happy by Visteon’s hideously low price to earnings ratio. The lower this number is, the less the market likes your stock, and they absolutely hate this one. This is the hallmark of the worst stocks in the market, and should serve to scare the pants off of us, not get us excited.
Aptif’s valuation isn’t as low as Visteon, meaning that its stock price hasn’t gotten hammered anywhere near as much, but they have taken a hit and sport a valuation well below average to show for it. These numbers measure how hot or cold a stock is, and both these stocks come in at quite cold indeed.
Aptif is actually in an exciting market, as they make components for smart transportation, and they certainly have some real potential long-term as a result. Aptif is clearly the better choice of these two picks by a wide margin, but it still needs to be good enough to make the cut given how many good stock picks that they are out there competing for our attention and our money.
Aptif may or not end up being an exciting stock, but it sure isn’t now. It could bear watching though.
Visteon, on the other hand, looks in need of the same resurrection that the auto sector in general needs. It’s not that Aptif doesn’t need this as well, but there may be more hope for one with them.
Autos are still a huge part of our lives, and it’s even hard to imagine a time where they didn’t continue to play this big role, whether that be with self-driven ones or even the models driven in the Jetsons cartoon. Time has passed their stocks by though, and this sector’s stocks are a long way away from exciting, and won’t be for at least a while. It’s hard to find items that valuable in the junkyard.