Bargain Hunting in the Auto Sector

Strategic Insights -

Automaker stocks such as General Motors Corp., Ford Motor Co. and auto-parts makers have recently hit 52-week lows, suggesting that the time to buy may be now. Contrary to traditional wisdom, the companies are not yet losing money, as investors anticipate a decline in sales and earnings due to rising interest rates. Historically, buying these stocks when they trade at or near 52-week lows has yielded significant returns.

Key Takeaways:

  • General Motors and Ford are trading at low price-earnings ratios, with GM at 5.4 and Ford at 5.9.
  • American Axle & Manufacturing Holdings Inc. is a recommended pick due to its relatively low debt and 2.4% dividend yield.
  • TD Banknorth Inc. is a banking services company with modest stock valuations, 14 times earnings and 1.8 times book value.
  • Ryan Restaurant Group Inc. has a strong earnings history, posting positive earnings for 18 consecutive years.
  • Jones Apparel Group Inc. has shown earnings growth averaging almost 10% per year over the last five years.

Statistics:

  • Since 1999, John Dorfman has recommended stocks trading at or near 52-week lows, generating an average gain of 60% over a period of 10 sets, varying from six months to six years.
  • Over the same period, the average gain for the Standard & Poor's 500 Index was 17%.
  • Automotive stocks are currently cheap, with the first six entries in a list of 49 stocks that hit new lows in March being automotive stocks, with General Motors having the lowest P-E ratio (5.4).
  • American Axle has a debt-to-equity ratio of 47%, lower than most auto-parts makers.

Sources:

  • John Dorfman, president of Dorfman Investments and columnist for Bloomberg News in "Bargain Hunting in the Auto Sector."