Al Root
Automotive investors tend to be a downbeat bunch. Years of below-average returns and rock-bottom stock valuations will do that to you.
Still, investors should look for the best automotive-related bets for 2025. Tesla stock just might be one of them.
Being an automotive investor isn't easy. Slow growth, technology disruptions -- see EVs -- that eat up capital, industry overcapacity, and slim profit margins seem to characterize the sector year after year.
Then there are one-off problems. Way-too-high dealer inventories led to the collapse in Stellantis' profitability in 2024 after a record 2023. CEO Carlos Tavares lost his job as the stock dropped 44%.
Stellantis is only part of the story. The 25 largest auto stocks in the Russell 3000 have lost an average of about 5% a year for the past five years and trade for less than 10 times earnings on average.
Then there is Tesla. That just befuddles traditional value-oriented automotive investors. Tesla stock has returned about 64% a year on average but trades for about 122 times estimated 2025 earnings. Auto investors have trouble paying up for that growth.
The current outlook doesn't inspire much confidence either. "This year will be difficult," wrote Bernstein analyst Daniel Roeska in a recent report. He sees stable demand -- a positive. He also sees lower pricing, weak EV profitability, and production cuts needed to manage growing inventories. The latter three issues are problematic.
He rates Ford Motor, General Motors, and Stellantis stocks all Hold. Roeska's views sum up the consensus. The average Buy-rating ratio for the original Detorit-Tree stocks is about 37%. The average Buy rating ratio for stocks in the S&P 500 is about 55%.
Weaker-than-average analyst sentiment isn't isolated to traditional auto makers. The average Buy-rating ratio for the 25 car stocks in the Russell is about 40%.
Still, avoiding it altogether risks missing out on some excellent returns. Tesla stock returned about 63% in 2024. GM shares returned about 50%.
How to find the right stocks, however, is the question. With a cyclical, low-growth sector, investors need to buy low and sell high. One way to do that is to buy stocks with improving analyst sentiment. Investors could have earned a respectable 20% in 2024 holding the car stocks that saw multiple upgrades throughout the year.
That's great, but how can one identify shares about to get upgraded? There is no perfect methodology to do that. Looking for stocks that have picked up a couple of recent upgrades and stocks where analyst sentiment appears to have bottomed out are two ideas.
By those measures, the best 2025 auto bets look to be Tesla, Ford, BorgWarner, and Dana.
In the case of Tesla, Borg, and Dana, analyst sentiment is improving.
Tesla is because of self-driving cars and new models. Elon Musk's auto maker plans to launch a new lower-priced EV model in early 2025 and start a self-driving robo-taxi service late in the year. Hitting those timelines will mean faster growth, higher earnings -- and more analyst upgrades.
Dana makes axles, driveshars, and other parts for cars, trucks, and heavy-duty machines. Analysts are becoming more optimistic about its shares after the company announced plans to sell its "off-highway business" in November. It accounts for roughly 30% of total sales.
BorgWarner appears to be a case of low valuation and strong business execution. BorgWarner makes parts of EVs and traditional cars, pointed out J.P. Morgan analyst Ryan Brinkman recently. It should be fine no matter what kind of cars people buy.
Brinkman called it his preferred auto parts pick for 2025 and has a $51 price target for the stock. At a recent $31.54, shares traded for less than seven times estimated 2025 earnings, down from about eight times a year ago.
Wall Street sentiment isn't improving for Ford. Instead, analyst sentiment may have bottomed out. Only 27% of analysts rate shares Buy, down from 45% a year ago. Shares can gain if the company can improve quality issues that cost Ford billions in 2024 operating profit.
If investors wait for a perfect backdrop to hold car stocks they will be waiting a long time. Best to look for ones that will work, no matter the backdrop.
As always, a stock screen is just a start. After identifying ideas comes the harder work of understanding all the ins and outs of what can impact each stock.
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
January 08, 2025 17:57 ET (22:57 GMT)
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