Auto Stocks

About Auto Stocks

Automakers are permanently cheap and mostly deserve to be. Enormous fixed costs, brutal competition, a union labor base, capital spending that never stops, and now the added burden of funding an electric transition while defending the profitable trucks that pay for it. A low P/E on a carmaker at the top of a cycle is one of the oldest traps in the market.

The genuinely good businesses in this category are further down the chain. Aftermarket parts retailers depend on how many cars are already on the road and how old they are, not on how many are being sold, so their demand actually improves when people delay buying new. They have been among the best performers in the whole consumer complex, and almost nobody thinks of them as auto stocks. Dealers are also better than they look, earning little on the new car and a great deal on used vehicles, financing and the service bay.

Suppliers carry an underappreciated risk. They are awarded a part for a specific vehicle program years ahead, spend the tooling money up front, then get paid per vehicle under terms that step the price down each year. A delayed or canceled program is expensive in a way no order book reveals. Lease residual assumptions are the other place losses hide.

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