Since the beginning of 2022, equity markets have been bearing the brunt of macroeconomic and geopolitical uncertainty. Rising interest rates, soaring inflation and log-jammed supply chains are dragging companies and the economy down, keeping investors on edge. The Fed has clearly stated that it is in no mood to ease its fight against inflation until the same comes down to its target range in a sustainable fashion. With the Fed expected to maintain its hawkish stance and, consequently, markets remaining volatile, one of the biggest mistakes we can make now is to resort to panic selling. Instead, savvy investors should see this as a buying opportunity.
Go Bargain Hunting for Undervalued Auto Stocks
In such volatile and uncertain times, cyclical sectors suffer more. One such sector is
Auto-Tires-Trucks
. The sector currently carries a Zacks Rank #9, which places it in the bottom 44% of the 16 Zacks sectors. Auto companies are battling severe chip crunch, supply chain snarls and commodity inflation. The sector has plunged around 47% on a year-to-date basis, underperforming the S&P 500’s decline of around 17%. Amid economic uncertainty, the auto sector’s prospects look muted. So, should investors avoid auto stocks? No.
The 2022 pullback has given investors a chance to scoop up strong stocks at attractive entry points, even if near-term volatility remains. Yes, the prices may drop further, but it is practically impossible to predict the bottom. So, investors with longer-term horizons interested in the auto space might consider buying some fundamentally sound stocks at what could look like bargain prices down the road. Bargain stocks typically trade at low valuations, not accurately reflective of their intrinsic value in terms of fundamentals like earnings, cash flow and leverage.
PACCAR
PCAR
,
Harley-Davidson
HOG
and
Mazda Motor
MZDAY
are a few such undervalued auto stocks that you should hit the buy button on now.
Our Methodology
The best way to find great value stocks is to pair a strong Zacks Rank with an impressive grade in the Value category of our Style Scores system. The Zacks Rank is a proven strategy that targets companies with positive earnings estimate revision trends, while our Style Scores work to grade companies based on specific traits. The Value category of the Style Scores system identifies undervalued companies by looking at a number of key metrics. These include the long-favored P/E ratio, P/S ratio, earnings yield, cash flow per share and a variety of other fundamentals that help us determine a company’s fair value.
Using the
Zacks Stock Screener
, we have narrowed our search to the aforesaid four stocks that have a favorable combination of a
Value Score
of A or B and a Zacks Rank #1 (Strong Buy) or #2 (Buy), with a market capitalization greater than $1 billion.
You can see
the complete list of today’s Zacks #1 Rank stocks here.
3 Value Picks in the Auto Space
PACCAR
: Headquartered in Bellevue, PACCAR is one of the leading names in the trucking business with reputed brands like Kenworth, Peterbilt and DAF. The new DAF lineup comprising XF and XG models (launched in 2021) and the XD model (launched in 2022) is driving the firm’s revenues.Continued growth in the aftermarket parts — which is a high margin and a less cyclic business, thanks to the rampant adoption of its proprietary MX engine — bodes well. Accelerated efforts toward electrification, connected vehicle services and advanced driver-assistance system options are set to bolster PACCAR’s prospects. Solid balance sheet with low leverage is another tailwind.
Valued at around $35 billion, PACCAR currently sports a Zacks Rank #1 and has a VGM Score of B. Over the past month, shares have inched down more than 5%. On the basis of price to earnings (P/E), PACCAR is trading at 12.29X multiple, below its one-year high of 18.10X and also lower than the median of 12.46X. The stock is also valued lower than the industry’s 24.48X. The current levels could be considered a good entry point.
The Zacks Consensus Estimate for PACCAR’s 2022 and 2023 earnings implies year-over-year growth of 53.2% and 3.1%, respectively. Over the trailing four quarters, the stock surpassed estimates on all occasions, the average surprise being 12.6%.
Harley-Davidson
: Milwaukee-based Harley-Davidson is one of the leading motorcycle makers in the world. In sync with long-term growth objectives to streamline its product portfolio, HOG is focusing on motorcycle models and technologies that better align with market trends.Its ‘Hardwire’ plans look to improve effectiveness and contribute to revenue growth. Per the plan, the company remains focused on bolstering its market position by putting more emphasis on sportier bikes and modern marketing strategy. Building on Hardwire strategy, the company announced Hardwire Stage II in May, aiming for increased performance.
With a market cap of more than $6 billion, Harley-Davidson currently carries a Zacks Rank #2 and has a Value Score of A. Over the past month, shares have inched down more than 4.5%. HOG shares currently trade at 9.5X P/E, well below the industry’s 24.48X. Its current P/E also represents a 17.2% discount from its one-year high of 11.48X and closer to the median of 8.80X. Considering its strong prospects, the stock appears to be trading at a fairly reasonable price.
The Zacks Consensus Estimate for HOG’s 2022 and 2023 earnings implies year-over-year growth of 12.4% and 1%, respectively. Over the trailing four quarters, the stock surpassed estimates on three occasions and missed once, the average surprise being 43.2%.
Mazda
: Japan-based Mazda engages in the manufacture and sale of passenger cars, commercial vehicles, along with automotive parts. The company is actively focusing on stepping up its e-mobility game, which is the future of transportation. Last month, it pledged to invest $10.6 billion to electrify its lineup of vehicles by 2030. Mazda’s collaboration with its main suppliers, such as Hiroshima Aluminum Industry, Imasen Electric, Ondo Corporation and HIROTEC Corporation, augurs well for the long-term growth of the company as well as the industry. Mazda’s efforts in procuring batteries to expedite its electrification initiatives are noteworthy.
Valued at around $5 billion, Mazda currently carries a Zacks Rank #2 and has a Value Score of A. Over the past month, shares have declined 6%. Shares appear to be trading at a bargain. The company’s P/E ratio currently sits at 4.73X. On a relative basis, the value is beneath its 6.86X one-year median value and high of 9.47X in 2021.The stock’s P/E also looks solid versus its industry’s average of 7.65X.This definitely looks like an opportunity to buy.
The Zacks Consensus Estimate for MZDAY’s fiscal 2023 sales and earnings implies year-over-year growth of 7% and 24%, respectively. Mazda has targeted about 4.5 trillion yen in net sales for fiscal 2026, indicating a jump of 45% from fiscal 2022. The company delivered a trailing four-quarter earnings surprise of 81.6%, on average.
Zacks Top 10 Stocks for 2023
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Zacks Top 10 Stocks
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