Today we screened for any stock in the Auto industry, and according to our methodology there is one segment of the industry that contains a number of Overvalued stocks. At Ockham, we cover 48 global stocks related to Autos representing these industry segments; Auto and Truck Manufacturing, Auto Parts Manufacturing, Retail-Automotive, and Retail-Auto Parts. When we look at the our ratings for each of the stocks we cover in these sectors (market cap. weighted), it is clear that Auto Part Manufacturing stocks have the least favorable valuations.
Looking a little closer into these auto suppliers, we have an Overvalued or Greatly Overvalued stance on 13 out of 19 of the stocks we cover. Our methodology attempts to identify stocks that are trading for higher valuations of price-to-cash earnings and price-to-sales than the market has historically been willing to pay. So, this means that many of these stocks have advanced well ahead of a corresponding fundamental improvement. For a long term investor this situation can be risky, as any disappoint going forward entails significant downside right, meanwhile steady improvements have likely already been priced in. In order to continue rising these stocks must greatly top expectations.
The three stocks that we find to be Greatly Overvalued are Autoliv (ALV), BorgWarner (BWA), and Johnson Controls (JCI). Each of these stocks has seen sales and earnings improve dramatically over this time last year, but their stocks have significantly outpaced the S&P 500. Despite a downturn so far this month, over the last six months JCI has tripled the return of the benchmark, BWA has returned 5 times as much as the benchmark, and ALV has achieved almost 7x the return of the S&P 500. Of course, these companies may be seeing a stronger rebound than many other stocks in the S&P 500 thanks to robust auto sales; however, these stocks recent pull back (about twice as fast as the index) suggest valuations are too hot.
So, if you are an investor in these stocks that has surfed better auto sales to great gains, you are to be congratulated. However, we think now might be the right time to rebalance away from your most overvalued stocks. As yesterday’s meltdown demonstrated, volatility appears to be back and that could mean trouble for auto suppliers.
