A Stock to Consider From the Beaten-Down Auto Sector

rted weakness in the automotive sector, second-quarter sales for Linamar Corporation (TSX:LNR) were up 6.6% from last year. Will this stock continue to pull away from big-cap competitor Magna International Inc. (TSX:MG)(NYSE:MGA)?

| More on:
car repair, auto repair

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.


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.


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.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

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.

More on Investing

dividends grow over time
Dividend Stocks

1 Magnificent Dividend Stock That’s Down 10% and Trading at a Once-in-a-Decade Valuation

This dividend stock may be down around 10%, but there is a huge future opportunity for those wanting growth as…

Read more »

Canada national flag waving in wind on clear day
Dividend Stocks

RRSP Must-Haves: 2 Canadian Stocks to Secure Your Future

The TSX’s dividend pioneer and first Dividend King are must-haves in an RRSP to ensure financial security in retirement.

Read more »

stock research, analyze data
Dividend Stocks

How Much to Invest to Get $500 in Dividends Every Month

TSX dividend stocks such as Enbridge, TD Bank, and Telus, can help you earn $500 in monthly dividend payments.

Read more »

A solar cell panel generates power in a country mountain landscape.
Energy Stocks

Clean Energy Play: Is Brookfield Renewable a Good Stock for a TFSA?

Add this top renewable energy stock to your self-directed TFSA portfolio for significant long-term and tax-free wealth growth.

Read more »

Golden crown on a red velvet background
Dividend Stocks

Dividend Powerhouses: Canadian Stocks to Fuel Your Portfolio

These two top Canadian dividend aristocrats are some of the top stocks on the TSX to buy now and hold…

Read more »

Dial moving from 4G to 5G
Dividend Stocks

This Undervalued Dividend Stock is Worth Buying Right Now

Want an undervalued dividend stock with long-term potential and a juicy yield? Here's an option you may regret not buying…

Read more »

A worker gives a business presentation.
Dividend Stocks

1 Stock I’m Buying Hand Over Fist in July Despite the Market’s Pessimism

This top dividend stock is going through a rough patch, but don't let that count out all the growth we've…

Read more »

financial freedom sign

2 Stocks With Millionaire-Maker Potential

These two top Canadian stocks are among the best on the TSX, and each has the potential to be millionaire-maker…

Read more »