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 Lear Corporation (NYSE:LEA) 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).
A technician installing a seat system in the interior of a car.
Lear Corporation (NYSE:LEA)
Number of Hedge Fund Holders: 40
Lear Corporation (NYSE:LEA) is an automotive technology company specializing in Seating and E-Systems. Its products include complete seat systems, key electrical components, and both low and high-voltage power distribution systems for all major automotive manufacturers. It is one of the best auto components and parts stocks to buy.
The company operates 265 locations in 38 countries, with the majority of its facilities and employees in low-cost regions. Its business is structured into two main segments: Seating, which includes complete seat systems and related components like leather and heating systems, and E-Systems, which provide advanced electrical distribution and connection systems for a wide range of vehicles, including those powered by traditional engines and electrified powertrains.
Lear (NYSE:LEA) continuously adapts to market trends by expanding its global footprint and making strategic acquisitions to enhance its capabilities. In July, the company completed its acquisition of WIP Industrial Automation, a Spanish company specializing in automation solutions using robotics and AI-based computer vision. The acquisition improves the company’s operational efficiency and help to address macroeconomic challenges like wage inflation.
It also complements previous acquisitions like ASI Automation and Thagora Technology, strengthening Lear’s (NYSE:LEA) innovation strategy under IDEA by Lear. The expansions provide the company with advanced automation technologies.
The company is also favored by analysts as the average price target of the stock among 17 analysts is $140, which represents a 33.50% upside to its stock price at current levels.
Overall LEA ranks 2nd on our list of the best auto components and parts stocks to buy. While we acknowledge the potential of LEA 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 LEA but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.