Last week, there was a report in USA Today concerning a glut of supply in the used car market driving down prices. Midsize SUVs, for instance, saw used vehicle prices plummet by over 11%.
This, after reports that while new vehicle sales in the U.S. are growing, they are still below 15 million annually compared with pre-recession peaks of around 17 million new cars and trucks sold each year.
There are also reports the average age of U.S. vehicles is pushing 11 years old. Think about that: For every new car on the road, there’s one out there that was built in 1990!
Everywhere you look, there are headlines showing American cars are just getting older. But aside from using this as ammo to angle for a deal the next time you need to visit Honest Abe’s Auto Rodeo on the outskirts of town, how can you use this information to your financial advantage?
Here are the biggest opportunities in auto stocks right now:
Buy Auto Parts Suppliers
If you haven’t been paying attention, the auto parts industry has consolidated greatly in the last several years. That leaves a short list of top suppliers that own the lion’s share of the market. These auto stocks include:
- Autozone (NYSE:AZO) – $13.9 billion market cap, $9.2 billion in 2012 sales forecast, five-year growth rate of 23.1%, 4,600+ U.S. locations.
- O’Reilly Automotive (NASDAQ:ORLY) – $9.9 billion market cap, $6.2 billion 2012 sales forecast, five-year growth rate of 24.9%, 3,800+ U.S. locations.
- Advanced Auto Parts (NYSE:AAP) – $5.0 billion market cap, $6.2 billion 2012 sales forecast, five-year growth rate of 21.5%, 3,400+ U.S. locations.
These three stores hold a huge share of the auto maintenance and repair market, from the big chain mechanic shops to the do-it-yourself gearheads looking for parts. Only Autozone stock has outperformed the market so far in 2012, but this is the easiest and most comprehensive way to play the after-market sales game if you want to invest in the trend of aging autos via auto stocks.
Buy Auto Component Manufacturers
What if you don’t want to play the retail game with auto stocks and just want to get into components? Well, there are handful of big-brand players that are key to after-market sales once a car leaves the showroom floor. These auto stocks are:
- Goodyear (NYSE:GT): This tire giant is one of the biggest brands in the auto market, and since vehicles naturally need replacement tires as they are driven longer, it’s a good play on the aftermarket. Another important fact is that Goodyear’s line of high-end tires to boost fuel efficiency are catching on, and after-market performance tires still remain in favor among the consumers looking for a premium driving experience. Goodyear fell on hard times during the recession, but an important refinancing and credit restructuring earlier this year puts Goodyear stock in a good position for the next few years, and forecasts of improving profits and sales are encouraging despite a 12% decline year-to-date.
- Wabco (NYSE:WBC): Wabco makes components for brake, transmission and suspension systems in cars, trucks and commercial vehicles. It’s not a sexy business making disc brakes and other run-of-the-mill components, but it’s important because these are essential parts in all vehicles that require regular replacement. Unlike Goodyear, Wabco has been on a tear this year, with +30% gains in its stock thanks to strong sales and the stock is up roughly 120% from early 2010.
- Delphi (NYSE:DLPH): Delphi makes safety and power train components. Like Wabco it isn’t a sexy auto play — but with +50% gains since its late-2011 IPO as it emerged from bankruptcy, it’s clear that Delphi has retooled and right-sized to capitalize on the parts boom. The company is not yet back at its pre-recession sales peak, but the restructuring thanks to Chapter 11 has streamlined operations and put it in a great place for the current environment.
Buy Used Car Sellers
Another retail twist on this trend is to invest in used car merchants themselves. Clearly as the aforementioned report indicates, there’s a bit of downward pressure right now on used vehicle prices. But the smart car lots can make up for it in volume and shrewd pricing of both purchases and sales of quality vehicles to maximize profits. A few used car merchants to consider are:
- CarMax (NYSE:KMX): up 8% YTD.
- America’s Car Mart (NASDAQ:CRMT): up 10% YTD.
- AutoNation (NYSE:AN): up 28% YTD.
- It’s worth noting that at least in September, new vehicle demand was pretty strong too. (Bloomberg)
- Of course folks are trading in their clunkers, meaning there are more older cars than ever out there … presuming they don’t get scrapped. (USA Today)
- Wondering what the most reliable used car is? Here’s a list. (Forbes via Yahoo! Finance to avoid the painfully click-tastic slideshow on Forbes.com)
Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at firstname.lastname@example.org or follow him on Twitter via @JeffReevesIP. As of this writing, he did not own a position in any of the stocks named here.