Are YOUR ETFs Packed with Vulnerable Auto Stocks?
I’ve been plenty bullish on a wide range of sectors – including financials, infrastructure, and defense.
But autos are definitely not one of them. That’s because more than a year ago, my research began turning up evidence of an incredible auto bubble here in the U.S.
Out-of-control, high-risk, subprime lending.
Record-high levels of leasing activity … because even extraordinarily generous loans weren’t enough to get strapped buyers into cars and trucks.
Record-high levels of “negative equity” — what you call it when you owe more than your vehicle is worth.
It’s a potent … and toxic … mix of forces. As a result, some investors have concluded we’re facing “Peak Auto” – a relatively painless plateauing period for the sector. But my experience researching and predicting the mortgage and housing crisis well in advance told me otherwise.
So I coined the term “Car-Pocalypse.” My expectation? Auto stocks would dramatically underperform the broad averages. Auto loan delinquencies would rise sharply. Used car prices would plunge. Surging auto inventory would drive profit margins much lower. And auto-sensitive credit markets would tighten up substantially.
That’s exactly what has started to unfold since then. Just this week, we learned that U.S. auto and truck sales sank to a seasonally adjusted annual rate of 16.5 million in March. That represented a 5.7% drop from February, and left sales at their lowest level in just over two years, according to Ward’s Automotive Group.
Among specific manufacturers, sales at General Motors (GM, Rated “B”) rose a much smaller-than-expected 1.6% from a year earlier, while sales at Ford Motor (F, Rated “C-”) skidded 7.2%. Fiat Chrysler (FCAU, Rated “C+”) sales fell more than 5%, while foreign automakers like Honda Motor (HMC, Rated “C+”) and Toyota Motor (TM, Rated “C”) reported small declines.
While those figures are troubling, they’re only half the story. Sales would have tanked even more if carmakers didn’t boost incentives to an average of $3,750 per vehicle. That’s equivalent to 10.3% of average sticker price, the highest level since recession-plagued 2009, according to J.D. Power.
Sector-wide inventory levels are also around the highest in eight years. To cite just one example, GM is now sitting on 98 days’ worth of unsold inventory. That’s up a whopping 38% from last March, and far greater than the 60-ish level considered ideal – a sure sign automakers are overproducing vehicles.
Meanwhile, thanks to record-high levels of leasing over the last couple of years, a glut of nearly-new cars is also flooding the market. The result is a sharp drop in used car prices. They plunged 8% year-over-year in February, according to the National Automobile Dealers Association. That was the biggest decline since November 2008 when the economy was in the throes of the last recession.
Not only will falling used car prices siphon demand away from the new car market, but they’ll also drive loss severities higher for over-exposed lenders. That’s because they’ll take a bigger bath every time they repo a car and auction it off.
In sum, auto stocks look dangerous to your wealth. But which auto and auto parts stocks are particularly toxic? Let’s take a look at the Weiss Ratings for your answer.
Here’s a Stock Screener that shows the worst-rated companies in the space, ranked from lowest-to-highest grade. I eliminated companies with less than $50 million in market capitalization, and less than 50,000 shares in average trading volume. I also blocked out a couple of foreign-based companies that predominately serve foreign markets, as this is a uniquely American auto bubble.
|Data Date: April 5, 2017|
You can see that as of mid-week, Voxx International (VOXX, Rated “D”) ranked the worst among sector stocks. The Orlando, Florida-based company makes radios, amplifiers, video systems, and more for use in cars and trucks. Next up is Workhorse Group (WKHS, Rated “D”) of Loveland, Ohio. It makes commercial vans, delivery drones, and other products used by a wide range of customers.
Some of the more traditional automotive companies that ranked relatively lower than industry peers include Ford and Adient (ADNT, Rated “C-”), the former Johnson Controls automotive seating and interiors company that was spun out from its corporate parent. Magna International (MGA, Rated “C”) is another supplier that’s in the lower end of the Ratings pool, and that has been steadily downgraded over the past two years.
If you average out year-to-date returns among these stocks, you get negative-8.9%. But even that relatively weak figure is propped up by the strong rally in shares of Tesla (TSLA, Rated “C-”), the upstart automaker that’s much newer, smaller, and unique than traditional car companies. Strip TSLA out, and you get an average drop of more than 14%. Both results are far worse than the 5.9% return for the SPDR S&P 500 ETF (SPY, Rated “B”) during the same timeframe.
Bottom line: I recommend staying away from auto stocks – and I also recommend scrubbing any ETFs or mutual funds you own to see if they’re overloaded with exposure. Something like the First Trust Nasdaq Global Auto Index Fund (CARZ, Rated “C”) that’s dedicated to the sector is one prime example of a vulnerable investment. So is the Fidelity Select Automotive Portfolio (FSAVX, Rated “C+”).
Keep in mind that auto and auto parts companies are classified as a sub-group in the “consumer discretionary” sector. So other ETFs and mutual funds you own may have a decent amount of auto exposure – even if they don’t have the word “auto” in their names.
What’s more, retailing stocks also typically make up a sizable chunk of consumer discretionary-focused funds. They’ve been laggards so far in 2017, and that means you could be facing a double-whammy of underperformance. So be sure to use the tools at the Weiss Ratings website to go through your ETFs and mutual funds to see what they hold … and help you decide whether you should keep holding them!
Until next time,
ETF Spotlight Edition , by Mike Larson, Senior Analyst
Mike Larson is a Senior Analyst for Weiss Ratings. A graduate of Boston University, Mike Larson formerly worked at Bankrate.com and Bloomberg News, and is regularly featured on CNBC, CNN, Fox Business News and Bloomberg Television as well as many national radio programs. Due to the astonishing accuracy of his forecasts and warnings, Mike Larson is often quoted by the Washington Post, Chicago Tribune, As-sociated Press, Reuters, CNNMoney and many others.