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Best Auto Stocks to Buy in 2021

How do you evaluate an automotive stock?

Automotive stocks fall into the consumer durables sector. This sector includes companies that make products for consumers that are intended to last for more than a few years, like washing machines, furniture — and cars and trucks.

Before investing in automotive stocks, it’s important to understand how economic cycles affect automotive companies and how these companies work to maximize profits and stay competitive during good and bad economic times.

Understand the auto sales cycle

Automakers and their suppliers are cyclical stocks, meaning that their profits rise and fall with consumer confidence. It’s easy to see why: When businesses and consumers are worried about the economy, they postpone buying new vehicles.

Auto sales’ cyclicality matters to investors because:

  • Automakers have high fixed costs, including their factories, tooling, logistics networks, and labor contracts. These bills have to be paid no matter how many cars get sold.
  • Automakers and suppliers also need to spend a lot on product development to ensure that they have a steady stream of competitive new products.
  • High costs and steady spending mean that profit margins in the automotive industry tend to be low, even during good economic times.
  • When sales slump, as in a recession, automotive companies’ profits fall sharply — putting future-product spending and the companies’ future competitiveness at risk.

Cash reserve

Most automotive companies cut future-product spending sharply during the 2008-2009 recession. The few that didn’t, including Ford and Hyundai, had fresh products in their showrooms when the recovery began and were able to gain market share.

That was an important lesson for the industry. Now most global automakers have substantial cash hoards — $20 billion is common — to keep future-product efforts running through the next recession, whenever it arrives.

Many automotive companies also pay dividends to their shareholders. Some automakers planned to use their cash reserves to continue to pay dividends during a recession, but during the COVID-19 pandemic, Ford and General Motors both suspended their dividends to conserve cash.


Generally speaking, the automaker with the newest products will get the highest prices and the best profits. Automakers must invest constantly to ensure that they have a steady flow of new products in their pipelines.

Nowadays, virtually all automakers and many parts suppliers are also making big investments in future technologies like electric vehicles and autonomous driving systems. Most experts believe that those technologies will be necessary for automakers if they are to stay competitive in the not-too-distant future.

Electric vehicles

Some of the most exciting opportunities of the next few years will involve manufacturers of electric vehicles. Electric vehicles are new and different, and most analysts expect them to largely displace internal-combustion vehicles over time.

Electric-vehicle companies might see high growth, which is exciting for investors. But it’s important to remember that the processes involved in developing and manufacturing electric vehicles aren’t all that different from those used by makers of traditional internal-combustion vehicles. That means electric-vehicle manufacturers face high costs just like traditional automakers.


Automotive Stocks Gear Up To Fight COVID-19

Major automotive and auto component manufacturers have seen their stock prices decline by an average of over -30% year-to-date, due to the Coronavirus pandemic. While General Motors stock is down by about -41% year-to-date, Ford is down by -47%. However, Tesla has bucked the trend, rising 68%. The health crisis has meant people really don’t need to drive much right now, and not many are buying new cars either. Irrespective of what local and country governments prescribe or guide, we don’t believe this is likely to change in a hurry. Discretionary spending is likely to drop as the economy slips into a recession, impacting auto sales.

Though steep declines have happened, more pain and declines are possible in the coming weeks as earnings and accompanying guidance confirm the bad on-the-ground situation. That said, given the U.S Federal Reserve’s backing, most of the companies should survive. All said, it might be wise to wait to invest in the theme, however brave investors could choose to invest a fraction into the theme now, still keeping funds ready if things unfold for the worse in the coming weeks and months. As part of our theme: Autos Fight COVID-19, we discuss further our analysis of the recent performance of key automotive stocks, the survival risks the key auto names face, and the potential downside.

Performance Summary

Our Automobile portfolio of 10 stocks including Ford, General Motors, Tesla, Navistar, Harley Davidson
, Advance Wabco, and Lear, shows an average decline of about -2% in the last five trading days (through April 23) compared with a -1.5% decline in the S&P 500 over the same period. Year-to-date, the portfolio is down by about -21% (or over -30% excluding Tesla), compared to about -14% for the S&P 500. Harley Davidson and Ford were the worst performers, posting declines of about -50% and -47% respectively year-to-date. On the other hand, Tesla has soared 68% year-to-date while Wabco Holdings, an auto components manufacturer, has seen its stock remain relatively flat. Overall, there is a significant variance and summarized on the dashboard Autos Fight COVID-19

Survival Check

We dive a little deeper to look at the vulnerability of key automotive players through the current downturn. Our analysis Can GM survive the crash indicates that with over $19 billion in cash in hand, General Motors will have a relatively low probability of bankruptcy. On the other hand, Advance Auto Parts, which has higher relative fixed costs and a lower cash balance faces more uncertainty. The company recently issued $500 million in notes to better manage its liquidity. View our analysis Advance Auto Parts: A COVID Recession can consume $513 Mil in cash during 2020 for more details on how a demand shock will impact the company’s financials and cash flows.

How Low Can Automotive Stocks Go?

Automotive stocks could be poised