There’s a revolution coming in the automotive industry, and I want you to profit from it, just as my readers profited from Tesla Motors (TSLA) when they bought the stock in 2011, when it was trading at 29.
Today, their profits exceed 600%.
But Tesla’s big advance is history. Today, I’m working on identifying the next promising stock that will benefit from the coming automotive revolution.
Will it be Apple (AAPL), or Google (GOOGL), or Mobileye (MBLY) or Uber (still private and valued at $62 billion) or some unknown company that’s not a household word?
The stocks of companies that are well known and well respected tend to be fully priced—sometimes overpriced—while the stocks of companies that are little known are often underpriced.
So, if you want to duplicate—or even exceed—the performance of Tesla Motors, the first step is to find companies that are not yet famous! Those often make for the most promising stocks.
But before we get to that, let’s review the opportunities in the coming automotive revolution.
Most obvious is the movement toward less polluting and more efficient automobiles. The hybrid Prius was a great first step for Toyota (TM), and the battery-powered Model S was a homerun for Tesla, but there are a slew of competitors coming down the pike including the Chevy Bolt, due later this year.
Unfolding fast is the movement to shared automotive use. ZipCar was a pioneer here, and Uber and Lyft are making excellent headway. Zipcar is now a subsidiary of Avis Budget Group, and Uber and Lyft are still private, though General Motors (GM) recently invested $500 million in Lyft. All three companies have already changed the world enormously, but much more will be done, as we move toward a world where individual cars are used more frequently by a variety of people, thus making more efficient use of a valuable asset and reducing demand in cities for parking spaces.
And then there’s the world of self-driving cars. Google and Apple are working on it, while Tesla regularly rolls out increased autopilot capabilities to its Model S sedans via over-the-air software updates. The holy grail of this movement is not only a reduction in the tedium of driving for the world of commuters, but also a reduction in the 33,000 deaths each year from automotive accidents (and that’s just in the U.S.).
Logophile’s Note: The original automobile was one that moved itself, rather than being moved by an animal. So might a vehicle that also steers itself be called an auto-automobile?
Getting back to the revolution, there’s Tesla’s business model, which involves selling direct to the consumer at a fixed price—a practice that Tesla customers love. If this model spreads, you’ll see the demise of the traditional auto dealership, home of one of the least trusted professions in the U.S.
And eventually will come the slow implosion of the gas station industry. Happily, many of these companies have diversified by adding convenience stores. Going forward, you might see stores ripping out their gas pumps!
So where are the profits for you in this automotive revolution?
Following the fundamental dots, you might invest in the companies that mine the raw materials for the batteries used in electric cars; you might invest in the companies that make the cameras and other sensing technology for autopilot technology; and you might sell short the major operators of gas stations, figuring that the slow implosion of that industry will be painful.
All those avenues might yield attractive investment opportunities.
However, any such opportunity might take years to pan out. Sometimes, timing is everything.
My traditional method is to find promising stocks that are going in the right direction now (because savvy buyers are accumulating shares), and see if there’s a fundamental reason such strength is likely to continue.
But a very efficient shortcut is to simply comb through all the stocks that Cabot’s expert analysts have recommended and see if one fits my scenario. And in this case, one does!
One Automotive Stock to Buy Now
The automotive stock I like now (let’s call it Company X) was originally recommended by Crista Huff, lead analyst of Cabot Undervalued Stocks Advisor. It’s not a young company, but it’s not a household word, either; instead, it’s one of those long-established companies that thrive by providing a variety of miscellaneous components to most of the companies in the automotive industry.
Some of these companies make seats, some make brake components, some make steering wheels, some make airbags (no, I’m definitely not recommending Takata) and some make electronics.
Company X is based in the U.S., but European manufacturers account for 45% of its revenues, while U.S. manufacturers account for 25% and Chinese 13%. In fact, the company is incredibly diversified, with 74 locations in 19 countries.
And what Company X makes is engines and drive train components. Some of these are traditional, old-school products, but the cutting edge work is in engines that are increasingly efficient to meet modern fuel economy requirements; in transmissions that serve the high-efficiency needs of hybrids; and in the electric motors that power electric cars themselves.
In fact, late last year, Company X acquired a smaller competitor with expertise in exactly that area: electric traction motors, starter motors and alternators.
Furthermore, Company X recently announced that it had been selected to provide the ultra-efficient transmission for a mass-market electric car made by one of the biggest automakers in China.
Here’s the transmission.
Isn’t it beautiful?
And here’s the car, looking just as attractive as any of the practical economical cars that Toyota and Kia and Hyundai churn out (those guys should be worried).
In short, Company X is making all the right moves to be a major player in the automotive revolution. And as a result, the company is growing faster than the industry. Earnings are expected to grow 8% this year and 12% next year.
But the market doesn’t view Company X as a promising stock yet—you can buy the whole company for less than one year’s revenues! Plus, the stock’s P/E ratio today is a lowly 11, which is pretty cheap considering the growth potential.
Lastly, we come to the chart.
After a long topping process in 2014 and 2015, the stock bottomed this February along with the broad market, and rallied quickly from 28 to 40. The May market correction brought it back down to 32, and I think that low will stand as bargain hunters get wind of the stock (in part thanks to Crista Huff) and the company’s influence in the automotive revolution grows.
If that sounds like a promising stock to you, Crista would love to have you as a regular reader. Every week, Crista updates her followers on her three portfolios—Growth, Growth & Income and Buy Low Opportunities—giving clear buy-hold-sell advice geared to both short-term traders and longer-term investors.
