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Should You Steer Clear of Auto ETFs & Stocks on Weak Sales?

Sweta Killa

After seven years of growth, the auto industry seems to be plateauing this year with sales declining for the fifth consecutive month. Notably, sales dropped 0.5% year over year to an annualized 16.7 million units in May. This has set the stage for the first annual decline since 2009, ending a string of seven annual gains for the industry – a streak not seen since the 1920s.

The numbers were discouraging as Americans generally boost their purchase of cars in May to take advantage of higher incentives and Memorial Day bonanzas ahead of the summer selling season (read: 5 ETFs & Stocks to Shrug Off Sluggish Retail Sales).

Higher discounts and strong truck demand failed to boost sales this time around given fewer replacing of old vehicles. Per Tom Libby, the industry analyst with IHS Markit, the average age of a vehicle on U.S. roads has inched up to about 11.5 years, indicating that people are holding onto their cars and trucks longer due to higher quality and reliability from all automakers. This is slowing sales of new vehicles further. Additionally, increased inventories have taken a toll on car sales.

Three of the six major American and Japanese automakers reported weaker sales with a decline of 1% for General Motors GM, 1% for Fiat Chrysler FCAU and 0.5% for Toyota TM. On the other hand, an increase in auto sales of 3% for Nissan NSANY, 2.2% for Ford Motor F and 0.9% for Honda HMC was recoreded. Fiat Chrysler has a Zacks Rank #2 (Buy) while Ford and General Motors carry a Zacks Rank #3 (Hold). The other three automakers have a Zacks Rank #4 (Sell).

The trends are still favorable for automakers given the strong momentum in the U.S. economy with accelerating job gains, rising wages, slowly rising inflation, increasing consumer spending and growing consumer confidence. Additionally, higher demand for light trucks and SUVs, a plethora of new models, fuel-efficient and technologically enriched vehicles, and low interest rates should lift car sales in the coming months.

Moreover, the auto sector has a solid Zacks Rank in the top 6% and the valuation looks appealing at the current level with a P/E ratio of 11.79, the lowest of all the 16 Zacks sectors. All these have set the stage for a rebound in auto sales in the coming months (read: Bet on Sector ETFs with Strong Beat Ratios).

ETFs in Focus

First Trust NASDAQ Global Auto ETF CARZ

This fund offers a pure play global exposure to 33 auto stocks by tracking the NASDAQ OMX Global Auto Index. It is a large-cap centric fund with a higher exposure to the top five firms at over 7% share each while the other firms hold no more than 5.35% of assets. In terms of country exposure, Japan takes the top spot at 33.4% while the U.S. and Germany round off the next two spots with 22.7% and 19.1% share, respectively. CARZ has a lower level of $18.3 million in AUM and trades in a small average daily trading volume of around 9,000 shares. The product charges 70 bps in fees per year and has a Zacks ETF Rank of 3 with a High risk outlook.

iShares Global Consumer Discretionary ETF RXI

While RXI provides broad exposure to the consumer discretionary space around the world, it has nearly 20% allocation to the auto industry. Holding 176 stocks, the fund is skewed toward the top firm at 9.3% while the other firms hold less than 4.7% share. American firms make up for 61.4% of the portfolio while Japan takes the next spot with a double-digit allocation. It has $246 million in AUM and charges 47 bps in annual fees. Average daily volume is light at around 23,000 shares.

First Trust Consumer Discretionary AlphaDEX Fund FXD

This fund also targets the broad consumer discretionary segment with nearly 11.2% allocation to the auto industry. It holds 124 securities in its basket with each holding less than 1.7% of assets. It has amassed $419.5 million in its asset base and trades in a good average daily volume of roughly 172,000 shares. It charges 61 bps in annual fees from investors and has a Zacks ETF Rank of 3 with a Medium risk outlook (see: all the Consumer Discretionary ETFs here).

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) or #2 (Buy) and a VGM Style Score of ‘A’ or ‘B’. The combination 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 stock has seen positive earnings estimate revision of six cents over the past 30 days for this year with an above-industry earnings growth rate of 15.46%. It has a Zacks Rank #2 with a VGM Style Score of A.

Cummins Inc. CMI

Based in Columbus, Indiana, Cummins Inc. is one of the leading worldwide designers and manufacturers of diesel engines. The stock has seen solid earnings estimate revision of 61 cents for this year over the past 30 days and has an expected earnings growth rate of 12.58%. It sports a Zacks Rank #1 with a VGM Style Score of B. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

SPX Corporation SPXC

Based in Charlotte, North Carolina, SPX Corporation is a provider of technical products and systems, industrial products and services, service solutions and vehicle components. The stock has seen positive earnings estimate revision of 12 cents for this year over the past 30 days and has an expected earnings growth rate of 13.61%. It has a Zacks Rank #2 with a VGM Style Score of B.

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