Last year, the outbreak of the novel coronavirus resulted in severe economic devastations globally including the U.S. economy. Very few industries have recovered fully from the pandemic. Meanwhile, the U.S. auto industry is one of the few industries that are witnessing strong recovery since the second half of 2020.
Partial reopening of the economy and removal of restrictions that were imposed during the lockdown and a strong appetite for personal vehicles instead of public transportations in order to maintain social distancing to protect from virus-led contagion helped in reviving the auto industry. At this stage, it will be prudent to invest in auto stocks with a favorable Zacks Rank.
Strong Rally in 2020
The overall auto sector and the domestic auto industry have performed exceptionally well in Wall Street during the pandemic period. The Zacks defined
Auto, Tires and Trucks
sector has jumped 120.7% in the past year. Currently, the sector stands at the top 7% of the Zacks defined 16 broad sectors.
The Zacks defined
Domestic Auto
industry, which is part of the above-mentioned sector, soared 307.9% in the past year. Currently, the industry stands at the top 12% of the Zacks defined 252 industries.
Momentum Likely to Continue
The FDA authorized two COVID-19 vaccines in December 2020, which means that the economy shouldl reopen and gradually operate at the pre-pandemic level. Since the lockdowns imposed in March, the U.S. economy is operating at a significant sub-optimal level.
On Jan 19, Dr. Rochelle Walensky, President Biden’s nominee to Head the Centers for Disease Control and Prevention, expressed her confidence that the country has enough COVID-19 vaccine doses to meet the Trump administration’s goal of immunizing 100 million people in 100 days despite a slower-than-expected rollout.
On Jan 14, President elect Joe Biden proposed a new $1.9 trillion coronavirus-aid package called “American Rescue Plan.” The proposed plan will include increasing direct payments to $2,000 from the existing $600 and supplemental unemployment benefits to $400 per week through September.
Moreover, the Fed is pursuing a remarkable ultra-dovish monetary policy since March 2020. The benchmark interest rate had been reduced to 0-0.25% in March and is likely to stay there at least up to 2023.
Strong pent-up demand and preference for personal mobility along with systematic removal of travel restrictions and easier credit conditions will drive demand for the domestic auto industry in 2021. According to IHS Markit, U.S. vehicle sales for 2021 are likely to grow 10% year over year to 16 million units. Fitch Ratings expects U.S. light vehicle sales in 2021 to increase nearly 10% year over year.
Our Top Picks
We have narrowed down our search to five U.S. auto stocks that have strong growth potential in 2021 and have witnessed robust earnings estimate revisions within last 30 days. Each of our picks carries either a Zacks Rank #1 (Strong Buy) or 2 (Buy). You can see
the complete list of today’s Zacks #1 Rank stocks here
.
The chart below shows the price performance of our five picks in the past three months.
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General Motors Co.
GM
designs, builds, and sells cars, trucks, crossovers and automobile parts worldwide. It operates through the GM North America, GM International, Cruise and GM Financial segments.
The Zacks Rank #1 company has an expected earnings growth rate of 23.9% for the current year. The Zacks Consensus Estimate for current-year earnings has improved 0.7% over the last 30 days.
Tesla Inc.
TSLA
has acquired substantial market share within the electric car segment. Strong performance and impressive design of the firm’s products are ramping up sales volumes. Increasing Model 3 delivery, which forms a major chunk of the automaker’s overall deliveries, is aiding the company’s top line. Along with Model 3, Model Y is contributing to its revenues.
The Zacks Rank #1 company has an expected earnings growth rate of 62.9% for the current year. The Zacks Consensus Estimate for current-year earnings has improved 1.6% over the last 7 days.
Harley-Davidson Inc.
HOG
manufactures and sells custom, cruiser, and touring motorcycles. It operates in two segments, Motorcycles and Related Products and Financial Services.
The Zacks Rank #1 company has an expected earnings growth rate of more than 100% for the current year. The Zacks Consensus Estimate for current-year earnings has improved 0.3% over the last 30 days.
Polaris Inc.
PII
designs, engineers, manufactures, and markets power sports vehicles worldwide. It operates in five segments: ORV/Snowmobiles, Motorcycles, Global Adjacent Markets, Aftermarket, and Boats.
The Zacks Rank #2 company has an expected earnings growth rate of 6.3% for the current year. The Zacks Consensus Estimate for current-year earnings has improved 0.3% over the last 7 days.
Fox Factory Holding Corp.
FOXF
is a designer, manufacturer and marketer of suspension products used primarily on mountain bikes, side-by-side vehicles, on-road vehicles, off-road vehicles, all-terrain vehicles, snowmobiles, specialty vehicles and applications and motorcycles.
The Zacks Rank #2 company has an expected earnings growth rate of 19% for the current year. The Zacks Consensus Estimate for current-year earnings has improved 0.9% over the last 30 days.
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