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A Stock to Consider From the Beaten-Down Auto Sector

I do not have a crystal ball to see the auto industry in 2018. But I can say with certainty that the market has put the auto sector at a low price-to-earnings (P/E) ratio, meaning that a value investor may want to take a peek. Ford Motor Co (NYSE:F) — with its Ford F-Series trucks at the top of U.S. sales in July — is a classic example of an auto stock with five-year forward and trailing P/Es under 10, staunchly below the market average.

Notwithstanding, with the cyclical nature of the industry and reported financial concerns about car loans, there are some diamonds in the rough. One example is Magna International Inc. (TSX:MG)(NYSE:MGA), a high-profile Canadian success story due to its global footprint, big-cap status ($23 billion), and quality business.

Another example is lesser-known Linamar Corporation (TSX:LNR); it manufacturers power equipment for automotive and commercial vehicles, construction machinery, and smaller business in wind turbines. Both of these companies can be viewed as lower down the automotive food chain, which may offer advantages as the industry transitions.

Magna

For those looking to pick up Magna, a global leader in automotive manufacturing, there have been great buying opportunities this year. The brief stock price low that settled around $53 per share in April meant that it was a nice time to pick this stock up.

While the stock price tends to swing more rapidly than the market average (beta is 1.27), the business is very sound. Analysts have given Magna a “strong buy” signal for several months. In the last 10 years, Magna has increasing revenue in all but two years. The earnings-per-share (EPS) compound annual growth rate is 15%, which is high for any sector.

Magna appears capable of evolving its business: this summer the company will start building BMW’s new 530e plug-in hybrid car. It’s a small and nascent area for Magna is artificial intelligence. A potentially compelling case would be on the assembly line to help automate quality, sorting, and handling procedures.

Linamar

Shareholders that have held Linamar since 2012 have been rewarded by a market-beating performance of a 339% return. The multi-year chart shows a nice Fibonacci retracement pattern with consolidation around $45 per share range in 2016.

Like Magna, this growth stock is helped by its EPS, currently at $8.26, which has doubled in four years. The return on equity of 20% is also above average. The company has a tonne of cash to work with. The recent second-quarter report was good for Linamar: adjusted net earnings and sales increased 9.7% and 6.6%, respectively, compared to last year.

Both of these stocks have room to climb. Allot your investment accordingly, like 3% of your portfolio, for example, and put the pedal to the medal.

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Fool contributor Brad MacIntosh has no position in any stocks mentioned. David Gardner owns shares of Ford. The Motley Fool owns shares of Ford.  Magna is a recommendation of Stock Advisor Canada.

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