The struggling, bailed-out, has-been U.S. auto industry has attracted the attention of the Chinese. The New York Times reports that the Detroit Chinese Business Association has about 100 Chinese-owned business members in the Detroit area, mostly auto related. The point is that the American auto industry, on its knees four years ago, has made a startling comeback. Using my guru strategies, which are computerized analytical tools based on the writings of some of Wall Street's greatest investors, I have identified three auto-related companies to watch. The Chinese don't have to be the only ones riding Detroit's coattails.
Magna International (MGA) is a major auto parts supplier. The company describes itself as the most diversified automotive supplier in the world, which should give it a competitive advantage over smaller, less diversified suppliers. My Peter Lynch-based strategy rates Magna highly. This strategy focuses on the PEG ratio, which is price-to-earnings relative to growth and measures how much the investor is paying for growth given the stock's current price. Magna's yield-adjusted PEG is 0.87, below the 1.0 maximum allowed. Another plus for Magna is its very low level of debt.
Another Lynch-strategy pick is O'Reilly Automotive (ORLY), which operates more than 4,000 retail stores in 41 states. It has an interesting niche in that its target market is not just do-it-yourselfers, but professional service providers whose market is do-it-for-me. Its PEG is a solid 0.78, though its debt load, relative to equity, is higher than Magna's.
American Axle & Manufacturing Holdings (AXL) is a favorite of the strategy I modeled after the writings of James P. O'Shaughnessy. Its competitive advantage comes from its market niche: The company designs and manufacturers driveline and drivetrain systems used in a variety of vehicle types, including passenger cars, SUVs and light trucks. The O'Shaughnessy strategy likes the company's market cap ($1.3 billion), five years of improving earnings per share, and low price-to-sales ratio of 0.45 (1.5 is the maximum allowed). The strategy then takes all the companies that pass these three tests and picks the top 50 based on their relative strategy, which is a measure of how well the company's stock has performed in the past year relative to the market. American Axle's relative strength of 90 places it in this top 50 cohort.
These three companies can drive you to the Promised Land that the Chinese and others think highly of. This is a good time to jump in.