Auto stocks have been all the rage in the past year. In fact, electric vehicle stocks have performed so staggeringly well that many experts believe they entered bubble territory long ago.
There is clearly a major investing opportunity in next-generation auto technology. But investors are right to be skeptical of stocks like Tesla (NASDAQ:TSLA) and Nio (NYSE:NIO). Both of those stocks are up more than 1,650% each in the past 18 months. But they both now trade at ridiculous valuations of more than 28 times sales.
For investors that see opportunity in the auto space but don’t want to pay suckers’ prices for bubble stocks, there are plenty of better options. Here are Bank of America’s five favorite auto stocks to buy in 2021:
Top Auto Stocks: Ferrari (RACE)
Analyst John Murphy says Ferrari’s high-end market focus and long backlog of orders makes it a great stock to buy during periods of economic turmoil.
As of 2019, Ferrari’s average vehicle selling price was around $324,000, leaving room for plenty of profitability. Tesla is considered to be a “club” by many of its owners. But Ferrari is an actual exclusive club. It’s extremely difficult to buy a new Ferrari even if you have the money to do so. That exclusivity helps the vehicles maintain their secondary market value.
“We believe its balanced strategy of volume growth, price increases, and model introductions over our forecast period should drive outsized revenue/earnings growth,” Murphy says.
Bank of America has a “buy” rating and $307 price target for RACE stock.
General Motors (GM)
While investors chase Tesla and Nio, General Motors is investing $27 billion in EV and autonomous vehicle technology through 2025. That investment will include the rollout of 30 new EV models. For comparison, Tesla currently has four models.
GM also doesn’t have to rely on outside funding for its EV investments. The company generated $4 billion in net income last quarter compared to $331 million for Tesla.
Finally, even after nearly tripling off its March lows, GM shares trade at just 8.4 times forward earnings and 0.6 times sales. Those numbers make the stock one of the most attractive value-growth combinations in the market. That’s why GM is the one and only auto stock that I own in my personal portfolio.
Bank of America has a “buy” rating and $72 price target for GM stock.
Top Auto Stocks: Ford (F)
Ford was late to the game at aggressively investing in future auto tech. However, it has come on strong lately. In November, Ford said it is building a $100 million plant in Missouri to build an all-electric van. The company has also said it plans to invest $11.5 billion in EVs through 2022. That investment includes Ford’s Mustang EV, which is already in production. Ford also said it is working hard on an EV version of its popular F-150 pickup, which could be a huge seller for the company.
Like GM, Ford can fund its own investments. The company generated $2.3 billion in net income last quarter. Like GM, Ford shares are also extremely cheap at just 9.5 times forward earnings and 0.2 times sales.
Bank of America has a “buy” rating and $12 price target for F stock.
Murphy is looking outside of the manufacturers for auto investment opportunities as well. Magna is his top 2021 stock pick among auto suppliers. He says Magna will be a major winner from the industrial and technical advancement of the auto industry.
Magna shares are up 60.3% in the past six months, but they still trade at an attractive valuation of just 11.9 times forward earnings.
Bank of America has a “buy” rating and $105 price target for MGA stock.
Top Auto Stocks: CarMax (KMX)
Finally, CarMax is Murphy’s top pick among used car retailers. He says the company’s transition from a brick-and-mortar retailer to a more omnichannel structure will help open the door for future growth.
“We believe that the record levels of trade-in/off-lease vehicles returning to the market in 2021+ will increase supply into the used vehicle channel and drive vehicle churn, which should re-accelerate volume growth,” Murphy says.
Bank of America has a “buy” rating and $121 price target for KMX stock.
On the date of publication, Wayne Duggan held a long position in GM.
Wayne Duggan has been a U.S. News & World Report Investing contributor since 2016 and is a staff writer at Benzinga, where he has written more than 7,000 articles. Mr. Duggan is the author of the book “Beating Wall Street With Common Sense,” which focuses on investing psychology and practical strategies to outperform the stock market.