5 Trends Auto Stock Investors Should Watch In 2021

Auto stocks have been some of the top performers in the market in the last year as investors position themselves for long-term growth trends from the next generation of auto technology, including electric and autonomous vehicles.

BofA Securities analyst John Murphy recently discussed five key themes auto investors should be monitoring following the Bank of America Global Auto Summit.

“Overall, the tone of the conference was cautiously constructive as the industry looks to normalize after COVID-induced downturn from 2020,” Murphy said in a note. 

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Here are the five themes the analyst is watching:

Investor interest is sky-high. Auto stock valuations are historically high, particularly among electric and autonomous vehicle pure plays. Yet Murphy said the market exuberance for auto stocks remains high and could be enough to support share prices in the near-term.

Supply is low and demand is high. The global semiconductor shortage and the blockage of the Suez Canal have constrained auto supply in the near-term, but demand for autos remains high. Murphy said he expects prices and margins will benefit in the near-term, and pent-up demand should trigger a “massive bounce” in sales once supply catches up to demand.

Manufacturers are being disciplined. The 2020 pandemic created an unprecedented headwind for the global auto market, but profits and margins remained high in the second half of 2020, suggesting the industry remained disciplined with pricing.

Murphy said the industry’s ability to navigate the pandemic effectively is reassuring to investors in a 2021 environment of inventory constraints and rising raw material prices.

Stimulus remains a tailwind. The latest round of stimulus payments resulted in a seasonally adjusted annual revenue rate of 18 million auto sales for the U.S. industry in the month of March. Murphy said the January and March stimulus payments will continue to boost auto sales throughout the second and third quarters as well.

The auto SPAC boom is a mixed bag. The flood of auto tech SPACs that hit the market in the last year has received a lot of attention from investors, but Murphy said the fact that most of the newly public companies are still years away from profitability in a highly competitive environment means investors should be careful picking winners and losers at this point.

Some of the new auto tech SPACs will likely be long-term winners, but many will probably burn out along the way, the analyst said. 

BofA has the following ratings and price targets for major auto manufacturers:

• Ford Motor Company F: Buy rating, $14 target.
• General Motors Company GM: Buy rating, $72 target.
• Ferrari NV RACE: Buy rating, $287 target.
• Tesla Inc TSLA: Neutral rating, $900 target.

Benzinga’s Take: The dynamic within the auto stock group is that pure play electric vehicle and autonomous vehicle technology stocks typically trade at some of the highest valuations in the entire market, while legacy automakers are among the most deeply discounted stocks in the market based on current sales and earnings.

Over the next several years, the winners and losers among the auto stocks will be determined by whether or not investors are pricing in too much optimism in next-generation auto stocks and discounting too much pessimism in the legacy manufacturers.

GM CEO Mary Barra. Benzinga file photo by Dustin Blitchok.