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Why the Auto Industry Has More Upside

By Frank Curzio, editor, Small Stock Specialist
Friday, April 16, 2010

The unpopular trade I told you about one month ago – to go long homebuilding stocks – is off to a great start. The big homebuilder fund (XHB) is up around 8% so far, and just hit a new yearly high.
 
Today, I have another trade most people will think is crazy... which is why it will work. The trade is to go long the auto parts manufacturing sector. Let me explain...
 
Some of the most important earnings reports you can listen to each quarter are the ones coming from the railroad business. These companies move around just about everything the economy needs to function. Each quarter, they break down their shipping volumes for analysts and shareholders.
 
CSX Corp is one of America's largest railroad companies. Last week, CEO Michael Ward said iron ore volumes grew 12% on higher steel production. Coal exports grew 21% based on strong demand from China. Fertilizer volumes rose on increased export and domestic demand. But the biggest news from Ward is this: Auto volumes grew 64% compared to 4% last quarter.
 
CSX knows a lot about cars. It transports one out of every three vehicles in the U.S., or 5 million annually. The fact that car volumes surged over the past three months indicates car demand is picking back up in a big way.
 
The auto industry was one of the worst hit during the credit crisis. In 2007, annual car sales in the U.S. totaled 16.1 million. In 2008, sales fell 18%. Then in 2009 car sales plummeted over 20%. The huge decline forced General Motors to file for bankruptcy. Every automaker was hit pretty hard.
 
So in 2009, the government did everything in its power to stimulate the industry. It injected cash into several automakers and even created the "cash for clunkers" program. That boondoggle gave consumers up to $4,500 to trade their old vehicles for news ones.
 
Since the program was only available for a short period, most analysts believed sales would jump and then collapse again. But the recent comments from CSX suggest demand is still strong. Consumers are still buying cars.
 
Sure, big names like Ford will benefit. The stock could push higher from these levels. But a better way to play the surge in demand is to buy auto suppliers. Like just about everything else, these companies have enjoyed a nice run up over the last year... but with demand increasing, I think there's more upside.
 
My area of expertise is stocks trading for under $10 a share... and below is a list of nine "under $10" auto suppliers that trade on major U.S. exchanges.
 
Company
Symbol
Price
Williams Controls
WMCO
$8.97
Tongxin International
TXIC
$8.09
Shiloh Industries
SHLO
$6.90
China XD Plastics
CXDC
$6.60
Motorcar Parts
MPAA
$6.45
Exide Technologies
XIDE
$6.27
Spartan Motors
SPAR
$6.02
Ballard Power
BLD
$2.52
Enova Systems
ENA
$1.45
 
I'm just getting started on my research here... so I'm not telling you to run out and buy any of these stocks. Next I'll look for insider buying, institutional ownership, growth potential, price...
 
After the comments made by CSX, we know the auto industry has more upside. I'm looking at the auto suppliers... you should too.
 
Good investing,
 
Frank Curzio




In The Daily Crux
Market Notes
Goods are moving again... truckers Knight Transport, JB Hunt, Landstar, and Werner make highs.
 
FedEx and UPS touch fresh 52-week highs, too.
 
New highs for network equipment makers Cisco and Juniper.
 
Earnings today... Bank of America, Gannett, General Electric, Mattel.
Market Watch
Symbol Price
Change
52-Wk
S&P 500 1221.53 +1.3% +10.1%
Oil 38.31 +1.4% -0.6%
Gold 138.07 +2.1% +16.3%
Silver 28.60 +2.4% +53.6%
US-Dollar 80.67 -0.8% +8.1%
Euro 1.32 +0.6% -12.1%
Volatility 18.01 -7.1% -19.8%
Gold Stocks 581.56 +3.0% +17.0%
10-Year Yield 3.02 +0.7% -10.7%

World ETFs
Symbol Price
Change
52-Wk
USA 122.89 +0.3% +11.3%
Canada 30.50 +0.2% +16.2%
Russia 21.94 +1.4% +18.1%
India 37.85 +0.3% +22.3%
Israel 16.69 +1.3% +10.8%
Japan 10.64 +0.6% +6.5%
Singapore 13.73 -1.1% +18.8%
Taiwan 14.78 +0.4% +19.2%
S. Korea 57.31 +1.3% +23.4%
S. Africa 71.87 +1.4% +28.2%
China 44.42 -1.4% -0.6%
Lat.America 53.17 +0.7% +8.4%

Sector ETFs
Symbol Price
Change
52-Wk
Oil Service 137.59 +1.0% +18.9%
Big Pharma 64.14 +0.0% -3.2%
Internet 72.07 -0.1% +23.4%
Semis 16.22 +1.2% +29.4%
Utilities 31.28 +0.2% +1.5%
Defense 18.52 +0.1% +10.6%
Nanotech 10.03 +0.4% +1.6%
Alt. Energy 10.08 +1.3% -3.3%
Water 18.49 +1.0% +14.5%
Insurance 16.14 +0.4% +21.1%
Biotech 20.54 -0.2% +28.1%
Retail 19.70 +0.3% +30.2%
Software 24.79 +0.8% +25.9%
Big Tech 53.87 +0.3% +22.7%
Construction 13.10 +0.9% +15.7%
Media 13.64 +0.5% +26.0%
Consumer Svcs 67.39 +0.2% +24.5%
Financials 55.04 +0.3% +7.4%
Health Care 64.30 +0.1% +2.0%
Industrials 63.54 +0.5% +21.0%
Basic Mat 74.35 +1.1% +25.3%
Real Estate 55.32 +0.1% +25.0%
Transportation 91.77 +0.7% +26.9%
Telecom 22.59 +0.5% +17.8%

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