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Auto Sales Drop in Q1: Should You Buy ETF & Stocks?

Sweta Killa

The U.S. auto industry saw a rough start to 2019 with a slowdown in the first quarter given higher interest rates, rising vehicle prices and threat of global slowdown. Nearly every major automaker reported decline in car sales last quarter.

The effects of the government shutdown and a pullback in the U.S. stock market at the end of 2018 also took a toll on the quarter’s sales. Additionally, the shift in consumers’ preference from passenger cars to larger, more comfortable pickup trucks and SUVs remained a drag on sales in the quarter (see: all the Consumer Discretionary ETFs here).

Of the six major American and Japanese automakers, Nissan Motor NSANY witnessed a sharp drop of 12% last quarter, followed by declines of 7% for General Motors GM, 5% for Toyota TM and 3% for Fiat Chrysler FCAU. However, Honda HMC sales rose 2% in the first quarter. Ford Motor F will reveal its quarterly sales number on Apr 4. Analysts estimated an industrywide annual sales rate of 16.7 million for Q1 - the slowest quarter since Q4 2014.

However, the prospects for the auto industry seem bright going into the spring selling season despite falling passenger car sales and intensifying competition in the high-margin SUV market.  This is especially true as a robust economy and strong labor market will encourage consumers to buy more vehicles. Additionally, boost in housing sales and lower lending rates will also drive demand for new vehicles. Further, the Fed’s dovish tone that it will not raise interest rates this year will lead more consumers to avail loans while buying homes.  

Moreover, the auto sector has a compelling valuation with a P/E ratio of 9.24, the lowest of all the 16 Zacks sectors. This could lead to an upside in the stocks this year. In order to tap the bargain price, investors could take a look at the pure play ETF and a few stocks that could be attractive picks this year:

First Trust NASDAQ Global Auto ETF CARZ

This fund offers pure play global exposure to 34 auto stocks by tracking the NASDAQ OMX Global Auto Index. It is moderately concentrated on the firms in its basket, with each making up for no more than 8.5% share. CARZ has a lower level of $20.1 million in AUM and trades in a small average daily trading volume of about 6,000 shares. The product charges 70 basis points (bps) in fees per year and has a Zacks ETF Rank #3 (Hold) with a High risk outlook (read: Is February Retail Sales Spooking You? Play These 4 ETF Areas).
Meritor Inc. MTOR

Based in Troy, MI, Meritor supplies drivetrain, mobility, braking and aftermarket solutions for commercial vehicle and industrial markets. The stock saw no earnings estimate revision in the past 30 days for this fiscal (ending in September 2019) but has an expected earnings growth rate of 10.89%. It carries a Zacks Rank #2 (Buy) and has a VGM Score of A. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

SPX Corporation SPXC

Based in Charlotte, NC, SPX Corporation is a diversified, global supplier of infrastructure equipment with scalable growth platforms in heating, ventilation and air conditioning (HVAC), detection and measurement, and engineered solutions. The stock saw positive earnings estimate revision of 6 cents for this year over the past 60 days and has an expected earnings growth rate of 17.73%. It carries a Zacks Rank #2 and a VGM Score of A.

Modine Manufacturing Company MOD

Based in Racine, WI, Modine operates primarily in a single industry consisting of the manufacture and sale of heat transfer equipment. The stock saw no earnings estimate revision and has an expected earnings growth rate of 15.06% for fiscal year (ending Mar 2020). It has a Zacks Rank #3 and a VGM Score of A (read: Sector ETFs & Stocks to Rally on US-Sino Trade Hopes).

Dana Inc. DAN

Based in in Maumee, OH, Dana is a provider of technology driveline, sealing and thermal-management products. The stock has seen positive earnings estimate revision of 7 cents for this year over the past 60 days and has an expected earnings growth rate of 10.44%. It has a Zacks Rank #3 with a VGM Score of A.

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