Automobile stocks belong within the durable goods category. This industry comprises enterprises that manufacture durable goods, such as washing machines, dishwashers, furniture, and automobiles.
Learning how automakers’ earnings are affected by economic cycles and how they may maximize profits and stay competitive in both good and bad times is crucial before putting money into the auto stock.
Should We Purchase Auto Stocks?
Since the March 2020 stock market crisis, auto stocks have increased. However, they have been declining since the beginning of 2022. The BSE auto index declined by 13% from January to March 2022. The lack of semiconductor chips caused the economic slowdown, and the ongoing conflict between Russia and Ukraine exacerbated this shortage. Russia and Ukraine are both providers of essential raw materials for the fabrication of semiconductors.
In March 2022, a decline caused by rising crude oil prices wiped out the gains achieved by car stocks following the outbreak. The trend has since changed, however. Auto stocks have increased by 25% since their 52-week lows, and it appears like auto stocks are regaining their previous grandeur.
Low metal prices, dropping gasoline costs, a new government policy on electric vehicles, and seasonal product demand have all contributed to this trend. Metal and crude oil prices have both declined during the past month. While the price of metals has declined by 20%, the price of crude oil has decreased by 11%. Crude oil prices and auto stock prices are correlated. When the cost of operating automobiles drops due to a decline in crude oil prices, automobile demand increases. A decrease in metal prices reduces the cost of raw materials for enterprises, which is positive for the profitability of car stock stocks.
In the meanwhile, the government of India has published its EV policy. Under this project, a battery-swapping technique was developed to expedite the introduction of electric vehicles. The statement has also increased the price of car stocks.
An early monsoon is projected to improve automobile sales as a result of increased demand. This has also led to an increase in the stock of car stocks.
Considerations Prior To Purchasing Automobile Sector Stocks
In 2022, auto stocks are the best bet for growth.
During the period from 2020 to 2023, the auto industry is projected to develop at a CAGR of 6.8%, fueled by rising demand from emerging economies and a rising need for mobility among people.
Consequently, the following things should be considered prior to invest in Auto Stocks in 2022:
1. Company’s Financial Condition
Avoid companies with excessive debt levels. If a corporation has too much debt on its balance sheet, it may not be able to repay its loans or bonds if it defaults. This might result in a rapid decline in the stock price, leaving investors with worthless shares of a bankrupt corporation.
2. Review Their Cash-Flow Situation
Before purchasing any stock, ensure that the company has the sufficient cash flow to last until it can turn a profit and resume paying dividends. If they do not have sufficient monthly cash flow, it is unlikely that they will be able to pay off their obligations anytime soon, which could lead to problems in the future if things do not improve quickly.
3. Dealing with Nature’s Cycles
Any business operating in this area must have a plan for dealing with expected downturns. A good company will be able to emerge from these recessions stronger, and they will be able to endure the storm and return even more powerful than before. To lessen volatility in their stock price over time, they must have a solid strategy for dealing with these cycles.
4. Reduce Volatility
The beta coefficient, determined using regression analysis on historical data, can be used to gauge the volatility of automobile stocks. The lower the beta coefficient, the less volatile it will be compared to other companies in the same sector or industry groupings, such as oil & gas or telecom services, etc., while higher values indicate higher volatility levels which may not be suitable for long-term investors who want stable returns over time without worrying about sudden drops due to external factors such as global economic slowdowns, etc., which may have a significant impact on the company’s sales volumes if they occur.
5. Visible Expansion
This indicates that you should seek businesses that are forthcoming about their growth strategies and annual sales projections. It is essential to consider visibility ingrowth and the capacity to emerge from downturns stronger. You want to ensure that the organization has a plan for long-term growth and has demonstrated resilience in the face of adversity.
How Do You Understand The Financial Statements of Car Companies?
The majority of automobile firms’ financial accounts are straightforward. Here are three important facts:
Tracking an automotive company’s financial performance often involves analyzing operating income or EBIT (earnings before interest and taxes) and operating or EBIT margins (determined by dividing profits by total revenue). The direct costs of production and distribution of vehicles, as well as R&D costs (which can be quite high in the automotive industry), are included, while indirect costs like interest and taxes are subtracted to ensure a steady profit margin.
Automakers frequently publish adjusted data that exclude the impact of one-time charges and profits, such as write-offs and tax windfalls, which are helpful for determining the business’s underlying performance. (Note that one-time expenses and gains might also be significant.)
Many manufacturers have financing operations that offer loans and leases to customers and dealers. Investors may find automotive financial statements complex as a result. Typically referred to as “automotive” or “industrial” numbers, most automakers provide debt and cash flow figures pertaining to their main automaking companies to assist. These can be used to comprehend a car company’s debt and to compare automakers.
Risks of Auto Stocks
Auto Stocks Remain Vulnerable to a Reversal in U.S. Vehicle Sales Automobile stocks continue to be susceptible to a reversal in U.S. car sales. In the early phases of the COVID-19 epidemic, monthly car sales were less than 3 million, but by mid-2021, they had risen to approximately 4 million. However, in June and August of 2022, sales dropped below 3 million vehicles per month due to rising inflationary pressures and chronic supply chain bottlenecks. Moreover, in July, the Amsterdam-based banking behemoth ING Groep N.V. (ING) reduced its 2022 global light vehicle sales growth forecast from 4.6% to -0.5%, citing production disruptions.
Chip Scarcity: car stocks continue to be threatened by a global semiconductor shortage. Automakers utilize chips to facilitate electrification, digital connectivity, and autonomous driving. Analysts anticipate that additional chips will become accessible in the second half of 2022, but the outlook remains clouded by competition from other industries, the ongoing conflict in Ukraine, and supply chain disruptions. In fact, industry forecasting and planning firm AutoForecast Solutions predicts that the chip shortage will halt the production of more than three million vehicles in 2022.
Best Auto Stocks to Buy
Although the automobile business thrives, not all sector stocks are equal. Of course, established automakers like General Motors and Ford are solid, reliable investments, and emerging automakers like Xpeng have tremendous development potential.
Where do you begin when so many auto stocks are available on the market? Below are some of the best stocks in the sector. These are excellent starting points for determining which stocks in the business are worthy of your investment cash.
Tesla Inc (NASDAQ: TSLA)
Tesla, founded in 2003 by Elon Musk, is a pioneer in the EV industry and has recently become a household name among both the general public and investors. Tesla stock is one of the most spectacular growth stocks on the market and has generated returns of over 100 percent over the past year.
Many say that the stock’s past performance pales compared to the company’s future potential.
Tesla blends cutting-edge technology with vehicles that are visually appealing. However, supplying EVs is no longer sufficient, as both newcomers and established enterprises are entering the EV market.
Tesla remains ahead of the competition by focusing on innovation, offering the most advanced technologies to consumers with each new model. The business is the frontrunner in the competition to mass-produce the first autonomous vehicles.
Currently, every vehicle produced by the corporation is equipped with some driver-assisted features, such as automatically applying the brakes when the vehicle gets too close to an object, altering its position when it gets too close to the road’s edge, or parallel parking itself.
Tesla has recently launched a $199-per-month subscription program that grants drivers access to more autopilot vehicles. The company’s vehicle owners can unlock all self-driving vehicles through this service.
Tesla is the first firm to make it feasible to remove your hands from the steering wheel and your foot from the accelerator, resulting in a more enjoyable ride.
Nonetheless, many investors have one major objection to the stock. The company’s value measures are ultimately problematic. With a price-to-earnings ratio (P/E ratio) exceeding 300, many consider the stock to be overpriced.
However, this high price-to-earnings ratio may just represent Tesla’s hefty infrastructure investments, which reduce its profitability. EVs and autonomous vehicles are still relatively new technologies, and to keep ahead of the competition, the companies involved in these goods must invest enormous sums in infrastructure, research and development.
Tesla may be positioning itself for long-term leadership, which is a much more attractive prospect than a few dollars in increased earnings today.
Nio Inc (NYSE: NIO)
Nio is a Chinese electric vehicle manufacturer with great investment potential. Currently, the Chinese economy is expanding rapidly, and automobile ownership is shifting from a status symbol to a necessity.
As a result, the auto sector in China is thriving, and with the country’s government making significant efforts to reduce its carbon footprint, it is only natural that EVs are in high demand in the region.
Nio has developed rapidly to become the market leader in a region where demand is expected to continue to surge. Although the company is headquartered in China and generates the great majority of its revenue from sales in the region, it is rapidly developing in both the domestic and foreign markets. The company just revealed that it had sent its first vehicles to Norway, marking its initial step toward entering the European market.
However, negative investors frequently raise concerns about the company’s lack of profitability. However, this may not warrant concern. The company is establishing itself as an industry leader within an emerging economy. Consequently, the current emphasis is not necessarily on producing money but on spending it.
In any new market, those who work hard to become dominant early on tend to become long-term leaders, and Nio is doing just that. Ultimately, it is not profitable because it is investing enormous sums of money in expanding its infrastructure to satisfy the region’s high demand.
However, this infrastructural expansion is only required once. Soon, the corporation will produce vehicles on a vast scale, resulting in substantial revenues.
XPeng Inc (NYSE: XPEV)
Founded in 2014, XPeng is a very young company in comparison to others in its sector, but its extraordinary success to date and anticipated future success cannot be discounted. The company’s value has surpassed $36 billion just eight years after its founding.
XPeng is preparing to become a significant Tesla competitor in China, and will likely enter the international market in the near future.
The company’s claim to fame is its ultra-affordable automobiles equipped with cutting-edge technology. XPeng is competing to bring self-driving vehicles to the globe utilizing lidar, radar, and cameras to assure their safety.
The company’s pricing and approach to the mass market are also successful. In the first half of 2021, the firm sold 30,738 vehicles. That is an impressive amount for a young company with limited production capacity. However, it is unlikely that this limited production capacity will endure for long.
The company’s lack of profitability is a major source of concern among investors. The company is new and expanding rapidly, but it must invest enormous sums of money in technology, infrastructure, and marketing to achieve this growth. Therefore, it makes sense that the company is not yet profitable.
The fact that the company invests so heavily in expansion and innovation may prove beneficial in the long run, making XPeng a company to keep an eye on.
Toyota (NYSE: TM) has long been a global leader in the auto sector. The other auto stocks have been playing catch-up. Therefore this is my top selection to purchase and hold. If the car industry is thriving, Toyota will likely be in the midst of it. In some measure, it paved the way for the EV revolution to occur. The triumph of the Prius weakened the supremacy of the ICE. Prior to that, all efforts to introduce a rival had failed.
Financially, the business is sound. It produced $33 billion in cash from operations last year. So that it has the means to pursue future endeavors. With the emergence of ESG investing, the company’s leadership position has improved. It has demonstrated its capability with hybrids and also has the Mirai.
While the world determines the next king of propulsion, TM stock has the foundation to excel. Due to its leadership position, it will have partners who are eager to do whatever is necessary to remain competitive. Also included are the fascinating solid-state batteries of the next generation. If EVs are to outperform ICE vehicles, their “gas” tanks must be improved.
Fisker (FSR) is one of the more recent entrants into the red-hot EV market, debuting as a publicly traded firm in 2020. The company’s calling card is the Ocean, a highly awaited, all-electric SUV slated to begin production and deliveries in late 2022. It is being marketed as “an attractive and economical alternative” to the Tesla Model Y and other electric SUVs.
As of April, Fisker has 56,000 reservations for the Ocean, representing over $2 billion in potential income. This indicates that demand for the company’s product is relatively high. In addition, Fisker has established an annual sales target of around 400 thousand vehicles by 2024. Additionally, the company anticipates having approximately four vehicles available to consumers within the next three years and a “substantial increase” in revenue. In addition, management anticipates a negative free cash flow of $300 million in 2022, which it intends to improve to approximately $2 billion in 2025 (! ), making Fisker an attractive prospective growth story.
General Motors (GM)
In recent years, the American automobile sector has not had an easy time of it, and it continues to struggle with backlogs and inventory problems. After this has deteriorated since 2020, I cannot blame poor management. Unique examinations were administered that year, and the industry has received a passing grade so far. Before hitting the Covid-19 cliff in 2020, General Motors (NYSE: GM) stock was already declining.
GM stock climbed 355% from the bottom before collapsing again. It is now below the beginning of the pandemic difficulties. Therefore it has resumed its downward trend from that year. Fortunately, just around $30 per share, potential support exists. This zone has been crucial for years, and therefore the bulls will once again battle for it. Since GM’s emergence from government control, it has served as a battleground.
This time, GM has the daunting task of moving to alternative fuels. This was once an informal objective, but it is now an official policy. It is determined to become the leading EV manufacturer.
GM stock should be included on any list of auto stocks. It is a giant, and its leadership is capable of making the transition. The adjustment will not be simple, therefore I anticipate periodic difficulties in the future. Its financial indicators are not ideal, but they are not causing alarm. It has adequate financial and other resources.
These companies are among the top performers in the auto industry and should continue to profit from the quick recovery of economic conditions in the coming months. Suppose the market is able to overcome the global scarcity of semiconductors. In that case, investors can anticipate that auto stocks will demonstrate relative strength as this crucial industry recovers ground lost during shutdowns.
However, it is essential to note that blindly following someone in the stock market is never a good idea. The most profitable investments are those made after extensive research on the specifics of the purchase. The potential returns are difficult to overlook if you do your homework and choose the best stocks in the sector.