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Auto Sales Slide Again in February: ETFs & Stocks in Focus

Sweta Killa

After having a banner year, the auto industry seems to have hit the brakes to start 2017. This is especially true, as February sales slipped 1.1% year over year on weaker demand for cars following a 3% drop in January. However, seasonally-adjusted annual sales remained strong at 17.57 million, indicating some optimism heading into the spring selling season.  

Who Gains & Who Loses

Among the six major American and Japanese automakers, General Motors GM, Nissan NSANY and Honda HMC outperformed with sales rising 4.2%, 3.7%, and 2.3%, respectively. The other three, Fiat Chrysler, Toyota TM and Ford Motor F posted steep declines of 10.1%, 7.2% and 4%, respectively.

In comparison, European automakers posted better results with Jaguar Land Rover posting a 16.4% rise in sales, followed by an increase of 14.5% for Volkswagen, 6.9% for Mercedes-Benz and 0.3% for BMW. The results were driven by higher demand for SUVs (read: 5 Sector ETFs & Stocks Likely to See a Great Year).

Overall, numbers were discouraging as higher incentives and Presidents' Day promotions failed to boost industry sales. Headwinds like prospect for higher interest rates and growing used vehicles stockpiles are weighing on the demand for new cars. Additionally, the industry is expected to take a hit from Trump’s policies of “big border taxes” on imported vehicles.

Still Favorable Outlook

However, the current trends are still favorable for automakers given that the U.S. economy is clearly on solid ground buoyed by an impressive labor market, rising wages, slowly rising inflation, and increasing consumer spending. Americans have an optimistic view of the economy with confidence hitting the highest level in more than 15 years. Further, higher demand for sport utility vehicles, plethora of new models, fuel-efficient and technologically enriched vehicles, and the need to replace aging vehicles would lift car sales in the coming months.

As such, investors could view the current data and the resulting fall in the share price of automakers as an entry point. For them, we have highlighted three ETFs and stocks from this corner of the market that are in focus and could be excellent choices in the coming months.

ETFs in Focus

First Trust NASDAQ Global Auto ETF CARZ

This fund offers pure play global exposure to 33 auto stocks by tracking the NASDAQ OMX Global Auto Index. It is a large cap centric fund with high concentration on the top five holdings with about 38.7% of assets. In terms of country exposure, Japan takes the top spot at 33% while the U.S. and Germany round off the next two spots with 23.6% and 19.2% share, respectively. CARZ has a lower level of $18.2 million in AUM and trades in a small average daily trading volume of about 8,000 shares. The product charges 70 bps in fees per year and has a Zacks ETF Rank of 3 or ‘Hold’ rating with a High risk outlook, suggesting room for upside.

iShares Global Consumer Discretionary ETF RXI

While RXI provides broad exposure to the consumer discretionary space around the world, investors could go for this product as it has nearly 21.4% allocation to the auto industry. Holding 176 stocks, the fund is skewed toward the top firm at 8.3% while the other firms hold less than 4.6% share. American firms make up for 62% of the portfolio while Japan takes the next spot with a double-digit allocation. It has $242.3 million in AUM and charges 47 bps in annual fees. Average daily volume is light at around 19,000 shares.

First Trust Consumer Discretionary AlphaDEX Fund FXD

This fund also targets the broad consumer discretionary segment with at nearly 11% allocation to the auto industry. It holds 119 securities in its basket with each holding less than 1.8% of assets. It has amassed $478.3 million in its asset base and trades in solid average daily volume of roughly 622,000 shares. It charges 61 bps in annual fees from investors and has a Zacks ETF Rank of 2  or ‘Buy’ rating with a Medium risk outlook (read: 17 Power-Packed ETFs for 2017).

Stocks in Focus

While all the auto stocks are in focus for the coming days, we have highlighted those that have the potential to move higher than their peers. To accomplish this, we have used our Zacks stock screener to find out the best stocks in the auto space having a Zacks Rank #1 (Strong Buy) and a VGM Style Score of A. The combination of these two offers the best upside potential with strong momentum, cheap price and robust growth.

Lear Corporation LEA

Based in Southfield, Michigan, Lear Corporation is a global leader in designing, developing, engineering, manufacturing, assembling, and supplying automotive seating, electrical distribution systems, and related components primarily to automotive original equipment manufacturers worldwide. The company has seen positive earnings estimate revision of $1.08 for 2017 over the past 60 days, representing year-over-year growth of 10.41%. The stock has a Zacks Rank #1 and a VGM Style Score of A.

American Axle & Manufacturing Holdings Inc. AXL

Based in Detroit, Michigan, American Axle is a world leader in the design, engineering and manufacture of driveline systems for light trucks and sport utility vehicles. It saw solid earnings estimate revision of 32 cents for 2017 over the past 60 days with an expected growth rate of 3.98% year over year. It has a Zacks Rank #2 and a VGM Style Score of A (see: all the Consumer Discretionary ETFs here).

SPX Corporation SPXC

Based in Charlotte, North Carolina, SPX is a provider of technical products and systems, industrial products and services, service solutions and vehicle components. The company has seen positive earnings estimate revision of a nickel for 2017 over the past 60 days, representing year-over-year growth of 5.44%. The stock has a Zacks Rank #2 and a VGM Style Score of A.

Bottom Line

An improving economy and increased consumer confidence will continue to drive auto sales higher in the coming months, making the above-mentioned ETFs and stocks compelling choices for investors to play for the rest of 2017.

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