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Auto stocks revving up for a rebound

August 28, 2013: 9:25 AM ET
With car sales on the road to recovery, it's time  for a fresh look at fast-growing auto stocks.

With car sales on the road to recovery, it's time for a fresh look at fast-growing auto stocks.

This article was published in the September issue of Money magazine.

While car manufacturers in June reported their strongest monthly sales in nearly six years, the industry hasn't fully recovered. Analysts forecast that vehicle sales in the U.S. should reach 16 million by 2014, which is still below the pre-financial-crisis highs of more than 17 million.

Since the dark days, though -- when sales dipped to 10 million in 2009 -- car companies have cut costs and repaired their balance sheets, in some cases with an assist from bailouts and bankruptcies. They're now positioned to thrive even if sales never return to the glory days of a decade ago.

Related: GM to return to Super Bowl advertising in 2014

The big names are only part of the trend. "A rising tide of sales lifts all boats," says Efraim Levy, an analyst with S&P Capital IQ. "It helps the automakers, parts manufactures, and dealers."

Think new

Ford (F) and General Motors (GM) are in the best position to benefit from the U.S. resurgence, says Morningstar analyst David Whiston. Ford is succeeding with fuel-efficient cars; sales of its small vehicles are up 39%. And GM successfully redesigned several models and addressed some of its pension problems. Both trade at discounts to their overseas rivals.

You can hold both through First Trust Nasdaq Global Auto Index ETF (CARZ), which also owns Daimler (DDAIF), Toyota (TM), and Hyundai (HYMTF) shares. This global exposure may come in handy. Levy says markets in Asia are progressing and Europe could see a turnaround.

Think used

A funny thing happens when people start shopping for new cars. They often realize that used is a better alternative, says Brian Macauley, co-manager of the Hennessy Focus Fund, whose top holding is CarMax (KMX).

Used-car prices in general have fallen over the past year, but the average selling price for a preowned vehicle at CarMax is up 1%, while same-store sales climbed 17%. John Fox, director of research with Fenimore Asset Management, which owns CarMax stock, says the firm could boost profits further by increasing its store count. CarMax is expected to open 14 stores in the next 12 months and about 10 to 15 a year in the following two.

Think parts

While car sales have picked up, the average age of a vehicle in the U.S. is still about 11 years. To keep those junkers on the road requires maintenance. That's why Forester Value owns shares of parts retailer AutoZone (AZO), says assistant fund manager Rebecca Scheuneman. AZO shares are also 30% cheaper than those of rival O'Reilly (ORLY).

Watch: How Audi sees the future of cars

Another parts play: Johnson Controls (JCI), the world's leading supplier of car batteries and a favorite pick for Levy. Profits for JCI, which is now making a push into lithium-ion batteries for electric cars, are accelerating 50% faster than the auto industry as a whole.

Send a letter to the editor about this story to money_letters@moneymail.com.

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