The novel coronavirus pandemic has impacted global automobile sales. As a result, auto stocks have been relatively subdued.
Of course, there are exceptions like Tesla (NASDAQ:TSLA), with the stock having surged by 295% in the current year. Similarly, Nio (NYSE:NIO) has rose by 226% for the year. As a matter of fact, both these companies are pure plays in the electric vehicle segment.
As the pandemic headwind is navigated, global auto sales are likely to be stronger in the coming quarters. It’s expected that the U.S. automobile market will rebound in fiscal year 2021. Moody’s forecasts that global auto sales will increase by 11.5% in 2021. Further, recovery is expected to continue beyond the next year.
With this outlook, it makes sense to consider exposure to quality auto stocks that have remained depressed. At the same time, TSLA stock and NIO stock are worth considering on corrections.
This column will discuss three auto stocks that can potentially accelerate in the coming quarters.
Let’s take a deeper look into the following names:
Auto Stocks to Buy: Ford (F)
I believe that F stock is positioned for strong upside in the coming years. There are several factors that make me bullish on the stock.
First, the company ended second quarter with a robust liquidity buffer of $39.3 billion. Ford will therefore emerge from the headwinds with ample financial flexibility.
Second, Ford has big plans for China in the electric vehicle segment. China’s EV market is big enough to absorb several players and Ford is likely to make inroads.
Third, Ford has an exciting pipeline of new vehicle launches that include the Mustang Mach-E and the Bronco family. This is likely to keep the company’s top-line momentum robust. The Mustang Mach-E will be available in the electric version as well.
Besides the new launches triggering growth, the company’s pickup trucks have already been a cash flow machine. Ford also retains the tag of being the top commercial vehicle brand in Europe.
Amid these factors, F stock has declined by 22% in the last one year. However, the stock has trended higher by 11% in the last month. I believe that this positive momentum is likely to sustain as valuations remain attractive.
General Motors (GM)
GM stock is another name that has been depressed in the last year but looks good for upside in the coming quarters.
Recently, analysts at Deutsche Bank wrote that General Motors should spin off its electric vehicle business. It would also give further access to funding to the EV segment. This is a possibility in the future and any potential news on this front can take the stock higher.
At the same time, Deutsche Bank also maintained their price target for the stock at $33. GM stock currently trades at $29 and the price target implies a potential upside of 14%.
In terms of growth triggers, Cairn Energy Research Advisors believes that global sales of EV will “jump 36% and top 3 million vehicles for the first time ever.”
This is the reason to suggest exposure to TSLA stock and NIO stock on any correction. This is also the reason to consider GM stock. General Motors plans to invest $20 billion between 2020 and 2025 for EV and autonomous vehicles. As these investments start yielding results, the stock is likely to trend higher.
In China, General Motors has a joint venture with SAIC Motor. The JV sold 3.1 million cars in China last year. With the JV planning to invest $4.3 billion in electric cars, General Motors is well positioned to benefit from the world’s largest EV market.
In North America, Chevrolet trucks and crossovers have been generating healthy sales. In Asia Pacific, Middle East and Africa, vehicles like Chevrolet, Wuling and Buick have been driving revenues. With focus on EVs, the company’s sales and cash flows are likely to accelerate in the coming years.
Tata Motors (TTM)
TTM stock is another name that I would consider for the coming quarters. As a matter of fact, TTM stock has outperformed Ford and General Motors stocks in the last year.
The company also hopes to end 2021 with positive free cash flows. The Jaguar Land Rover is the cash flow machine for Tata Motors. Land Rover sales have continued to improve in all regions after the coronavirus-driven slump. If this improvement sustains, the stock is headed higher from current levels.
Like most other automobile companies, Tata Motors is working on electric version of vehicles across ranges. This will help in sustaining growth.
I also like Tata Motors since the company is based out of India. In the coming decade, there is ample scope for growth in the country and Tata Motors is an established brand name. Overall, Tata Motors is a relatively lesser known name in the auto industry, but the company’s outlook is promising. In particular, as Jaguar Land Rover sales trend higher again.
Faisal Humayun is a senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modelling. Faisal has authored over 1,500 stock specific articles with focus on the technology, energy and commodities sector. As of this writing, he did not hold a position in any of the aforementioned securities.