The 10 Highest Potential Returns in Auto Stocks
In a private speech to the Financial Planning Association, legendary Vanguard Founder and former CEO John Bogle made an observation that's absolutely critical to understanding where the best stock returns come from -- and how to find the next great stock to buy.
He told the assembled guests that only three things drive investor returns:
Dividends
Earnings growth
Changes in valuation
That's all it comes down to. Historically, stocks have returned 9.6% per year on average -- 5%, 4.5%, and 0.1% from dividends, earnings growth, and valuation changes, respectively. Naturally, the best stocks to buy are the ones that will produce the highest combined return.
So which auto stocks will earn investors the best returns today? Obviously, no one can say with total certainty. You should always take future estimates with a grain of salt, particularly when analyst forecasts are involved. In fact, studies show that analysts' long-term earnings-per-share estimates tend to be off by some 40%, so I've reduced their estimates accordingly.
But by running the numbers, we can compile a list of which stocks are the implied best buys today. Here are our assumptions:
Company | Dividend Yield (current) | 5-Year Growth Rate (reduced by 40%) | Price-to-Earnings Ratio (in 2016) |
|---|---|---|---|
China Zenix (NYS: ZX) | 0% | 14% | 22 |
American Axle (NYS: AXL) | 0% | 9% | 18 |
General Motors (NYS: GM) | 0% | 6% | 14 |
Tenneco (NYS: TEN) | 0% | 21% | 29 |
Thor Industries (NYS: THO) | 3% | 10% | 18 |
TRW Automotive (NYS: TRW) | 0% | 4% | 13 |
Cooper Tire & Rubber (NYS: CTB) | 3.6% | 4% | 13 |
Johnson Controls (NYS: JCI) | 2.1% | 11% | 20 |
Ford Motor (NYS: F) | 0% | 5% | 13 |
Lear (NYS: LEA) | 1.1% | 7% | 16 |
Data from Capital IQ, a division of Standard & Poor's. Includes stocks on major U.S. exchanges capitalized over $200 million, with positive earnings and at least one analyst issuing long-term earnings estimates.
And here are their implied five-year annualized returns for shareholders. I've ordered the three return components by their reliability -- first dividends, then earnings growth, then valuation.
Company | Dividend Return* | Earnings Growth Return | Valuation Return | Implied Cumulative Annual Return |
|---|---|---|---|---|
China Zenix | 0% | 14% | 48% | 61% |
American Axle | 0% | 9% | 36% | 45% |
General Motors | 0% | 6% | 25% | 31% |
Tenneco | 0% | 21% | 7% | 28% |
Thor Industries | 3% | 10% | 13% | 26% |
TRW Automotive | 0% | 4% | 19% | 24% |
Cooper Tire & Rubber | 4% | 4% | 15% | 23% |
Johnson Controls | 3% | 11% | 8% | 22% |
Ford Motor | 0% | 5% | 17% | 22% |
Lear | 1% | 7% | 12% | 21% |
Source: Author's calculations. *Assumes dividend growth at rate of earnings growth.
The raw numbers tell us that these are the 10 most promising names in auto. Of course, analysts' growth assumptions for any individual company could prove overly optimistic or pessimistic, as could their future valuations, so the implied cumulative returns are hypothetical. That said, this list helps you focus on this sector's highest potential returners -- and provides an excellent starting point of names for further research.
So don't stop here. If any of these stocks interest you, add them to your personalized stock Watchlist. If you haven't started one yet, click here to begin.
At the time thisarticle was published Ilan Moscovitzdoesn't own shares of any company mentioned. You can follow him on Twitter @TMFDada. The Motley Fool owns shares of Ford Motor.Motley Fool newsletter serviceshave recommended buying shares of Ford Motor and General Motors. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.
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