Year 2018 has not been hunky-dory for auto stocks. During this year, several factors — including the trade spat between the United States and China, escalation of repayment burden due to rising rate of interest, soaring fuel costs, and escalating raw material prices — put a brake on the price movement of the auto stocks. In fact, over the past year, the broader Zacks Auto sector has decreased 24.1%, whereas the Zacks S&P 500 composite declined by 4.9%.
The auto sector is going through a rapid transformation. Firstly, the rush for electric and autonomous future compelled the automakers to invest hugely in alternative fuel, as well as research and development, in order to comply with the strict environmental regulations. Secondly, the declining popularity of small passenger cars, along with rising demand for crossovers, sports utility vehicles (SUVs) and trucks, brought significant changes in the business strategies of the automobile companies. This resulted in the opening of plants and closing of the unviable ones by several automakers. This is, in turn, putting a huge strain on the companies’ margins.
However, strong economy, low unemployment rate and robust consumers’ sentiments boosted demand for automobiles.
2019 Looks Better for the Auto Sector
In fact, some automakers, bolstered by their strong fundamentals and positive macroeconomic factors, managed to post decent price performances in 2018.
Further, the outlook for the auto sector is promising. Moody’s provided a stable outlook for the global auto industry over the next 12-18 months, courtesy of robust demand from emerging markets such as China, Russia, Brazil and India.
Additionally, there are chances that Beijing may cut tariffs on auto manufacturing from 40% to 15%. With the possibility of lower tariffs, U.S. automakers are likely to gain better access to China, the largest auto market in the world.
Selecting the Winning Stocks
Given this backdrop, it seems prudent to pick stocks that have beaten the sector as well as the S&P 500 composite stocks significantly over the past year. We have considered auto stocks that managed to experience positive price appreciation year to date.
Allison Transmission Holdings, Inc.: This Indianapolis, IN-based company is a designer and manufacturer of fully-automatic transmissions for commercial and defense vehicles. The stock has risen 1.5% year to date.
Fox Factory Holding Corp.: This Scotts Valley, CA-based company is engaged in designing, engineering, manufacturing and marketing of ride dynamics products worldwide. The stock has improved 54.5% year to date.
CarGurus, Inc.: This Cambridge, United States-based online automotive company is engaged in connecting buyers and sellers of new and used cars. The stock has risen 12.9% year to date.