We recently compiled a list of the 7 Best Auto Components and Parts Stocks to Buy Right Now. In this article, we are going to take a look at where BorgWarner Inc. (NYSE:BWA) stands against the other auto components and parts stocks.

Auto Sector Outlook Adjusted with Focus on Innovation and Market Realities

As reported by Barron’s on September 10, Deutsche Bank analyst Edison Yu analyzed the U.S. automotive industry and gave a cautious outlook. Out of 17 car companies he reviewed, only three were rated as Buy, which is lower than usual. Yu thinks the U.S. car market is reaching the end of its growth phase after the boost it got post-pandemic. While the situation is not collapsing, he pointed out that high car prices, expensive payments, and high used car prices are making the future of new car prices less promising.

Other analysts also showed a similar sentiment as we discussed in our article about the most undervalued auto stocks to buy. Here is an excerpt from the article:

“As reported by TipRanks, Morgan Stanley recently released a report, in which in which it pointed out major changes in the automotive industry, mainly due to China’s growing production capabilities. The firm mentioned that China is now making 9 million more cars than it sells, which is shaking up competition in the Western market.

Due to this, the bank has downgraded its assessment of the U.S. auto industry from Attractive to In-Line. The change reflects rising vehicle inventories in the U.S., affordability challenges for consumers, and an increase in credit defaults among less-than-prime borrowers.

On a brighter note for car dealerships, the bank upgraded several franchise dealer stocks to Overweight.”

More Americans Owe More Than Their Cars Are Worth

A report from Edmunds.com reveals that more Americans with auto loans now owe more than their vehicles’ worth, with the average upside-down loan reaching a record $6,458 in the third quarter. This reflects rising financial strain on consumers, as delinquency rates on auto loans have also surpassed pre-pandemic levels.

While owing slightly more than a vehicle’s value isn’t necessarily critical, Edmunds noted that 22% of borrowers with negative equity owe over $10,000, and 7.5% owe more than $15,000. The issue stems largely from consumers who bought vehicles at inflated prices during the pandemic, with their values dropping as inventories recovered.

Prime Auto Loans Show Strain but Broader Crisis Unlikely

Matthew Mish, UBS head of credit strategy, recently joined CNBC’s ‘Squawk on the Street’ and highlighted growing concerns around auto loan delinquencies. While traditionally, subprime loans were the primary concern, prime loans, which represent 80-85% of auto loans, are now showing elevated delinquency levels approaching those seen in 2009. However, Mish emphasized that net losses are not increasing at the same rate as delinquencies, partly due to a trend called “churning,” where borrowers miss payments but then catch up.

Despite these concerns, he noted that auto loans only make up a small portion of household and bank debt. Mish also pointed out that consumer credit, especially auto and credit card loans, may face more challenges moving forward, but he downplayed the possibility of a broader financial crisis. He further indicated that while mortgage delinquencies are rising, they remain below historical averages, and the focus should be on consumer loans.

The bank downgraded its view on high-yield auto credit to Underweight, but Mish advised caution and noted that the data does not yet indicate a severe economic downturn.

Our Methodology

For this article, we used stock screeners to identify over 30 auto components and parts stocks with a market cap above $300 million. We narrowed our list to 7 stocks most widely held by institutional investors. The stocks are listed in ascending order of their hedge fund sentiment, which was taken from Insider Monkey’s Q2 database of 912 hedge funds.

Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).

BorgWarner Inc. (NYSE:BWA)

Number of Hedge Fund Holders: 41

Topping our list of best auto components and parts stock is BorgWarner Inc. (NYSE:BWA), an automotive and e-mobility solutions company headquartered in Michigan. Its products improve vehicle performance, efficiency, and air quality. It primarily supplies OEMs of light and commercial vehicles, as well as aftermarket customers worldwide. The company operates manufacturing facilities across Europe, the Americas, and Asia, serving nearly every major automotive OEM.

In 2021, the company introduced its “Charging Forward” strategy to expand its EV product portfolio through investments and acquisitions. By 2027, the company aims to achieve over $10 billion in annual sales from its eProducts. As part of this strategy, the company completed acquisitions of key businesses, including Eldor’s Electric Hybrid Systems, Hubei Surpass Sun Electric’s charging business, and Drivetek AG, strengthening its EV and hybrid technologies.

In July, BorgWarner (NYSE:BWA) secured its largest North American contract for its high-voltage eFan system, designed for heavy and medium-duty BEVs from a major global OEM. Production is set to begin in late 2027. The eFan system, which includes a fan, e-motor, and integrated high-voltage inverter, delivers up to 10 kW of power and 40 Nm of torque, with options for varying power needs.

Its components are liquid-cooled for long-term reliability and offer reduced noise levels. The system supports voltage ranges from 550V to 850V and is scalable for different commercial vehicle applications, including BEVs and fuel cell vehicles.

On October 14, The Fly reported that Evercore ISI upgraded BorgWarner (NYSE:BWA) stock from In Line to Outperform and raised the price target from $39 to $43. The firm explained that despite many auto investors showing limited interest in the sector due to ongoing market volatility, its approach focuses on maintaining a defensive stance as a strong strategy.

Overall BWA ranks 1st on our list of the best auto components and parts stocks to buy. While we acknowledge the potential of BWA as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than BWA but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.

Read Next: $30 Trillion Opportunity: 15 Best Humanoid Robot Stocks to Buy According to Morgan Stanley and Jim Cramer Says NVIDIA ‘Has Become A Wasteland’.

Disclosure: None. This article is originally published at Insider Monkey.