Let’s Buy Some Alpha: Automotive & Parts

I am sure most people know what “alpha” means when talking about trading/investing. Anyhow, you can see the Investopedia definition below:

Alpha, often considered the active return on an investment, gauges the performance of an investment against a market index used as a benchmark, since they are often considered to represent the market’s movement as a whole. The excess returns of a fund relative to the return of a benchmark index is the fund’s alpha.

Source: Investopedia

Every trader who wants to outperform has the obligation to find alpha. And since this is the name of this very website, I will give you one industry that should add alpha to your portfolio.

In the first week of this month, I wrote an article about undervalued retail stocks, in which I discussed the strong economic upswing and the fact that retail stocks were performing rather badly. Retail stocks are up almost 4% since then. I am currently long the SPDR SP Retail ETF (XRT), which is a good thing on one hand because of the 4% gain. On the other hand, it’s a waste of margin, because I didn’t focus on the strongest companies in the retail business.

In this article, I will give you a few numbers to support why I think you should buy auto vehicle and parts companies.

Graph: 12.4% of XRT consists of auto vehicles and parts stocks.

(Source: ETF.com)

(Source: Lithia Motors)

First, let me start with a graph you have seen in my retail article. Retail sales growth has gone up to almost 5% in December 2016. Retail growth is closely following leading indicators like the ISM Non-Manufacturing Index.

Retail sales in the motor vehicle and parts business are also back on top after plummeting in the first half of 2016. Motor vehicle and parts sales are growing 7% versus one year ago. These levels suggest a very healthy market environment.

Industrial production should also hit 9% or 10% in the first quarter. Note that the leading ISM index is currently at 56, which indicates tremendous potential when it comes to industrial production growth. Also note that total industrial production is very close to zero, which means the motor vehicle industry is outperforming once again.

New orders are also increasing steadily. I believe orders will hit 10% year-on-year growth in the first quarter of this year.

The current situation shows that leading economic indicators are increasing. This is pushing industrial production, new orders and retail sales up. Motor vehicle and parts companies are dominating all of the things I just mentioned.

The graph below shows the ratio spread between Lithia Motors (NYSE:LAD) and the Retail ETF XRT. Lithia had been a massive outperformer until the correction in 2016 due to weaker fundamentals. At this point, we see the stock is back on track.

This spread is perfectly following the fundamental trend. This means you should buy companies in the motor vehicle and parts business again. I strongly believe Lithia and its peers are going to be massive outperformers over the next 1-3 months. You won’t regret buying them instead of the XRT ETF or the entire market (NYSEARCA:SPY). In other words, if you want alpha, you buy these kind of stocks.

Many thanks for reading my article. Please leave a comment below if you have questions, remarks or a completely different opinion. Also keep in mind that I only come up with the ideas. I don’t know your strategy or financial position. Always take care of your own risk management!

Good luck!

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in LAD over the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I am/we are currently long XRT

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