Electric vehicle stocks may be too hot to touch right now. But the EV world isn’t the only place to find opportunity in the automotive sector. Even as markets rebound, auto-parts stocks remain far below past highs. As the novel coronavirus brought auto manufacturing to a halt, investors bailed out of the space. Yet, now, with factories back up and running, things may be recovering more quickly than previously presumed.
Granted, the auto-parts space isn’t exactly the most high-flying industry. Prone to feast-or-famine cylicality, it’s not a great place to invest long term. But, today’s economic conditions may make it prime time to consider these high-risk, but high-opportunity stocks.
As things improve faster than predicted, their share prices could quickly bounce back to past highs. With this in mind, jumping in today looks like a worthwhile endeavor. So, which auto-parts stocks should you consider buying?
Taking a look at names in the sector with market capitalizations above $500 million, these five stand out as potential winners in the near term:
- BorgWarner (NYSE:BWA)
- LKQ Corporation (NASDAQ:LKQ)
- Magna International (NYSE:MGA)
- Standard Motor Products (NYSE:SMP)
- Tenneco (NYSE:TEN)
As the auto sector makes an epic recovery, consider them solid buys in today’s market.
Auto-Parts Stocks: BorgWarner (BWA)
BWA stock took a big dive when automakers suspended operations due to the coronavirus earlier this year. But, as things slowly return to normal, shares in the drivetrain and engine parts supplier have doubled off their March selloff lows.
So, can investors expect shares to continue rallying from today’s prices (around $35 per share), back to its 52-week high of $46.60 per share? Granted, it’s no slam-dunk. As this commentator noted, revenues are set to decline between 20% and 27% this year.
Yet, there’s plenty of reason why shares could keep climbing higher. As the auto industry bounces back sooner than expected, this company’s performance could top expectations as well. Also, its upcoming acquisition of Delphi Technologies (NYSE:DLPH) could help move the needle. Not just from expected cost savings. But also, from expanding their book of business in key areas such as electrified powertrain technology.
The easy money may have been made with BorgWarner when it was selling at fire sale prices. But, shares today still offer a favorable risk/return proposition.
LKQ Corporation (LKQ)
Most of the names listed in this article target the OEM market. In other words, their focus is on supplying parts to automakers. In contrast, LKQ stock is a play on the aftermarket segment. It mainly provides parts and components to those repairing and accessorizing their vehicles.
As Guggenheim’s Ali Faghri said in June, the recent rebound in driving post-lockdown is good news for the aftermarket space. Sure, the company’s revenues fell 25% during the pandemic. But, if a V-shaped recovery comes to fruition, expect this hiccup to be small potatoes in hindsight.
So, how much further could LKQ stock rise? In terms of the valuation, shares look reasonably priced, at a forward price-earnings ratio of 13.5. Historically, shares have traded at a much higher multiple. In other words, there’s plenty of reasons why shares could soon retrace their past highs above $36 per share. The stock currently trades for around $26 per share.
Reasonably priced, and operating in what’s a more stable segment (aftermarket) of the overall industry, this may be one of the strongest auto-parts stocks out there to buy.
Magna International (MGA)
How so? Namely, electric vehicle components have higher margins than comparable internal-combustion parts. In short, this could boost this major auto-parts supplier’s profitability over the long term.
Also, MGA stock currently sports a 3.6% dividend yield. This makes it one of the few auto-parts names out there offering something for income investors.
Sure, as shares have doubled off their lows, they could pull back, as investors may have gotten ahead of themselves regarding an automotive recovery. But, with shares still far below past highs, share price upside may still exceed downside risks.
Standard Motor Products (SMP)
Standard Motor Products is another auto-parts name focused on the aftermarket segment. With a market cap of $896 million, this is a much smaller auto-parts purveyors than most of the names mentioned in this article.
Yet, small size could mean big opportunity for your portfolio. Shares have bounced off their recent lows. But SMP stock hasn’t rallied as much its peers in both the OEM and aftermarket space.
However, the investment community’s recent indifference toward this stock isn’t a reason to write it off as an opportunity. With its manageable debt load, the company should be more than able to ride out today’s headwinds. Also, strong results in the next few quarters could get investors excited again for this under-the-radar stock.
To top things off, its strategic acquisition strategy could mean it takes advantage of the industry’s challenges and make some bolt-on acquisitions. With a solid track record of acquiring businesses that complement its existing strengths in temperature control and engine management parts, this overlooked name could be a strong long-term buy, hiding in plain sight.
Auto-Parts Stocks: Tenneco (TEN)
Last but not least, there’s Tenneco. You could argue that this auto-parts name bit off more than it could chew when it merged with Federal-Mogul back in 2018. The company’s high debt load makes it riskier than some of the other names mentioned here. But, big risk may be more than matched by massive potential upside.
How so? With investors fearful auto plant shutdowns would bring this company to the brink, TEN stock crumbled from $10 before the pandemic, to prices as low as $2.21 per share at the height of the maelstrom.
Nevertheless, as things wound up less bad than previously feared, shares more than tripled, and now trade for around $7.20 per share. Yet, this may not mean the stock has topped out just yet.
The company’s cost-cutting program remains in motion, with $200 million in expected annual cost savings by the end of 2021. Coupled with what could be a swift rebound in OEM and aftermarket parts demand, TEN stock stands a strong chance of retracing past highs — climbing back to prices above $15 per share.
This may be the riskiest auto-parts stock discussed here. But it could offer the greatest upside potential. Don’t bet the ranch, but consider shares a speculative buy.
Thomas Niel, contributor to InvestorPlace, has written single-stock analysis since 2016. As of this writing, Thomas Niel did not hold a position in any of the aforementioned securities.