Renewed interest in auto stocks and better technical trends prompted Ned Davis Research Group‘s sector strategist Pat Tschosik to issue an upgrade on the industry group, despite the fact that it has lagged the Standard & Poor’s 500 by more than 40 percentage points from September 2013 to May 2017. Since May, however, the group has shown improvement.
In exchange-traded fund land, the options to get just auto stock exposure aren’t great. First Trust Nasdaq Global Auto Index (ticker: CARZ) is tiny and doesn’t provide broad exposure to the global automobile industry. Rather it holds 34 car manufacturer stocks such as General Motors (GM), Ford (F), and Daimler (DDAIY), which account for about 8% of assets apiece. It also charges 0.70%.
Global X Lithium & Battery Tech (LIT), which holds battery makers and users, has done a better job of capturing investors’ attention lately with all the excitement over electric cars. It charges 0.75%, a higher fee than CARZ, but has attracted more assets. It helps that the ETF has returned more than 53% in the last year, compared to CARZ’ 23%, according to Morningstar.
General Motors, which makes up for about a third of the U.S. auto industry’s market capitalization, has outpaced the S&P by almost 20% since May 25. Auto parts companies Lear (LEA) and BorgWarner (BWA) have climbed too in the last four months. Tschosik, however, remains cautious and wrote in a client note published Thursday that his upgrading the sector to Market-weight should be considered a short-term, tactical play. He would like to see more improvement in U.S. and global vehicle sales. He wrote:
First and foremost, our concern with fundamentals is that it sure looks like the 18.1 million SAAR (seasonally adjusted annualized rate) that we saw in December 2016 was a secular peak for U.S. auto sales. In addition, we are not that impressed by auto sales trends in China and Japan, though Eurozone sales continue to trend up. We have seen estimates for autos damaged from Hurricanes Harvey and Irma range from 600,000 to 1 million, but not all damage will translate to new car sales. Sales of pick-up trucks should certainly get a lift from sales in Texas. The sales could help reduce high inventories. At the end of August, domestic auto dealers had an estimated 95 days of inventory versus a long-term average of 77 days.
Stricter lending standards and higher auto loan delinquency also doesn’t bode well for the industry.