Auto stocks have really pulled the brakes in recent years, thanks in part to macro headwinds and the threat of a looming economic contraction. Indeed, when times are good, the auto stocks tend to roll higher, only to roll downhill at the first signs of subtle economic weakness.
The booms and busts of the auto industry are really nothing new. And though many beginner investors may shy away from the economically oversensitive sector, I’d argue that it makes a ton of sense to bet a net buyer when times are bad, and a recession or slowdown is already on the radar of everybody on Wall or Bay Street.
Remember, the bad economic days do not last forever. And oftentimes, the level of fear tends to overswing to the downside. Of course, bad times can always get worse. But it’s always darkest before the bottom is put in and the new bull run kicks off!
I have no idea how hard the next downturn will hit. But I see quite a bit of turbulence in the broader auto scene. Braving a falling knife can be detrimental to one’s health, but if the valuation makes sense, I think initiating a long-term position may prove wise. That is, if you’re willing to endure a bumpy ride with the autos!
Let’s check out three autos that I think are underpriced.
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Magna International
Magna International (TSX: MG) is a Canadian auto part maker that will live to see better days once the auto sector is ready to rev its engines again (pardon the pun, folks!). The move toward electric vehicles (EV) is one that will be going on through the next decade.
Of course, downturns could cause many consumers to put off upgrading to an EV. But once the tides turn, I think Magna and other firms pivotal to the auto industry will be in a spot to surge higher, perhaps at a staggering rate, once we have more evidence that the economy is headed for a soft-ish type of landing.
Anything rougher than a soft landing, though, and Magna stock could continue to feel the hit. The stock’s already down over 40% from its 2021 high, however. With a nice 3.4% dividend yield, I view Magna as worth riding out until the road smoothens. The recent quarterly beat is encouraging, but the firm needs to put up another few before it can sustain a rally past its mid- to high $80 ceiling of resistance.
Tesla
It’s been a choppy ride for Elon Musk’s EV firm Tesla (NASDAQ: TSLA), in recent years. Recent action in shares is enough to make all but the bravest investors a bit carsick. At 75.7 times trailing price to earnings, the EV kingpin isn’t all absurdly priced if you view it as a tech company with a specialty in artificial intelligence (AI) and a front-row seat to the self-driving future.
Either way, Elon Musk is a genius, and he’s more than worth paying up for. Just how much is too much? That’s the big question. I’d argue Tesla’s fortunes course turn in a hurry once auto demand picks up again. As such, I’d be ready to nibble my way into the stock gradually over time.
