Toyota Motor Corporation (ADR) (NYSE:TM) recently sustained its title as the world’s number-one automaker, and while it currently flaunts a P/E well above that of its industry partners, forecast earnings expect to knock that down to the range of 13. Unfortunately for Toyota, it has few options for further growth, besides simply cutting costs and increasing earnings that way (which is becoming increasingly difficult with environmental restrictions). It’s not that Toyota is a sell, but simply that it’s pretty close to a fair price. Sure, you might not lose as much money if you invest in Toyota, but there’s no reason to expect you’ll make any, either. And if you’re in the stock market to lose the smallest possible amount of money, you’re in it for the wrong reasons.
Finally, Nissan Motor Co., Ltd. (ADR) (PINK:NSANY) actually looks like a decent investment. Although it faces similar problems to Toyota Motor Corporation (ADR) (NYSE:TM)regarding limited global market share, it has the advantage of a smaller size of that market share, thus leaving it capable of growth within the automotive industry. Furthermore, the company uses a unique cross-ownership with Renault to cut costs, and has opened the possibility — and risk — of leading the movement into all-electric vehicle power. However, that last factor is a major uncertainty, and if the investment does not pay off, Nissan could struggle. For all of the great things going for it, Nissan remains a fairly risky play.
Safely choosing the safest stocks
It is also important to keep in mind that mid-cap stocks have historically outperformed their larger peers. Traditionally, analysts would expect large-cap stocks to have the lowest beta values, since they have attained—at that point—a fairly consistent performance. The key lesson, of course, is that—as with everything else in the stock market—numbers do not generally mean exactly what they seem to say. In a risky market, it makes sense to cut back on risk, but not in an absolute sense. It certainly would seem a bit reckless to put too much money in a company like BYD, which has a risk level to match its beta. But, to the long-term investor, the stock market is less important than the company, so risk assessments should focus more on a company’s ability to remain or become consistently profitable. Risk—both systematic and unsystematic—plays a role, but it should only influence investment decisions, not make them.
*Taken from a Morningstar list of competitors in the automotive industry
**Calculated using historical data from Yahoo! Finance and the author’s own calculations
Will Chavey has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.
The article In a Risky Market, Safe Stocks Are Often not the Answer originally appeared on Fool.com.
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