Expert's Podium

As auto sector moves into high gear, a few stocks stand out

Special to The Globe and Mail

A GM storage lot at the company's Oshawa, Ont., plant. (Kevin Van Paassen)

John Reese is founder and CEO of Validea.com and Validea Capital Management, and portfolio manager for the Omega American & International Consensus funds. Globe Investor has a distribution agreement with Validea, a premium Canadian stock screen service. Try it.

Only four years ago, the North American auto industry was in shambles. Once-proud icons like General Motors , Ford , and Chrysler lost a combined $62.3 billion (U.S.) in 2008.

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The industry’s bleak outlook is now brightening, thanks in large parts to massive infusions of cash from governments in the United States and Canada, as well as vigorous restructuring. GM, Ford, and Chrysler (now a part of Fiat) all made money in 2011 – a combined $28 billion. And things are continuing to look up in 2012, with March car and truck sales up 13 per cent from a year before in the U.S., according to edmunds.com.

The combination of pent-up demand caused by the Great Recession, growing wealth among consumers in emerging markets like China, and rising fuel prices – which are leading drivers to trade in older cars for newer, more fuel-efficient models – makes the future look not too bad for auto makers. And considering where things were a few years back, “not too bad” is pretty darn good.

I create quantitative strategies based on the approaches of such investment greats as Warren Buffett and Peter Lynch and right now several of my investing models are rating auto-related firms very highly. Here's a look at the car companies my strategies like best.

General Motors Co.: Detroit-based GM increased sales 12 per cent in March, with nearly half of its sales coming from its more fuel-efficient cars and crossovers. The auto maker earns a solid 90 per cent score from the model I base on the writings of investment manager Kenneth Fisher.

In the mid-1980s, Mr. Fisher pioneered the use of the price-to-sales ratio (PSR) as a valuation tool. He found this ratio, which divides a stock’s price by the company’s sales per share, to be a more reliable indicator of a company's prospects than the price/earnings ratio.

This model considers PSRs between 0.4 and 0.8 to indicate good values among cyclical companies. GM's PSR of just 0.27 is thus exceptionally attractive.

Daimler AG: The former parent of Chrysler saw its car sales bounce 12 per cent in the first quarter while its truck sales jumped 20 per cent. The firm is based in Germany but makes a number of vehicles that are popular in North America, including Mercedes, Smart – and, for those with a spare half-million dollars hanging around, Maybach.

The stock elicits strong interest from my James O'Shaughnessy-inspired value model. When looking for value plays, Mr. O'Shaughnessy targeted large firms with strong cash flows and high dividend yields. Daimler qualifies with a market cap of about $65 billion, $11.02 in cash flow per share (more than eight times the market mean), and a solid 4.8 per cent yield.

Miller Industries Inc.: Tennessee-based Miller makes bodies for wreckers, towing and recovery equipment, car carriers and a line of transport trailers. Its market capitalization is only $200 million, but it has taken in more than $400 million in sales in the past year. The firm has manufacturing operations in the U.S., France, and the U.K.

Miller gets strong interest from my Peter Lynch-based strategy. Mr. Lynch famously used the P/E/Growth ratio to find bargain-priced growth stocks. This ratio divides a stock’s P/E ratio by the long-term growth rate of its earnings.

When we divide Miller's 9.1 P/E ratio by its 29.2 per cent long-term earnings per share growth rate, we get a P/E/G of 0.31. That falls into this model's best-case category (below 0.5).

Another reason the Lynch model likes Miller: The firm has no long-term debt.

O'Reilly Automotive, Inc.: Missouri-based O'Reilly sells aftermarket auto parts, tools, supplies, equipment, and accessories to both professional service providers and do-it-yourself customers. The 55-year-old company has about 3,700 stores in 39 states.

O'Reilly gets interest from my Lynch-based model. Its long-term growth rate of 25.5 per cent and P/E ratio of 25 make for a 0.98 P/E/G ratio, which just qualifies the stock under this model's upper limit.

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