Do soaring sales make auto stocks a buy?

Not all of them. Here are 2 to buy and 2 to hold.

By InvestorPlace Dec 7, 2012 1:36PM

 A young man buying a new car copyright i love images, Cultura, Getty ImagesBy Susan J. Aluise


IPLOGOAutomakers upshifted in November, with U.S. sales surging 15% and hot new models wowing crowds at the L.A. Auto Show. But look past that glossy veneer and you'll see several dents.


Despite last month being the best November performance since 2007, dealer inventories and incentives are rising -- two bad signs. Ford (F) dealers are sitting on about a four-month supply of Fiestas. GM (GM) dealers have five months worth of Malibus and Camaros. And despite having Patriots quarterback Tom Brady as a pitchman, Chrysler's (FIATY) 2013 Dodge Dart is up to a six-month supply.


Generous incentives have helped Toyota (TM), Honda (HMC) and Nissan (NSANY) gain ground in the U.S. after last year's natural disasters pummeled production. For example, Nissan incentives averaged $4,273 last month, 80% higher than October and up 45% from a year ago, according to TrueCar.com.


So what does all this mean for investors? A lot depends on how -- or if -- the fiscal cliff gets resolved. That's why I'm leery of taking a new position in any consumer cyclicals right now -- including auto stocks. But if you feel confident that lawmakers will hash out a deal, here are two auto stocks to buy. And no matter what happens in D.C., here are also two to hold.


To buy

Ford: Ford U.S. sales rose by about 6% last month to 177,673 vehicles, leaving it solidly in second place. The F-Series pickup continued its strong run, and other big winners included the Focus and Mustang.


Not faring so well lately are the Fusion and the struggling Lincoln brand, which is getting a whole new -- and much-needed -- branding campaign.  


Bottom Line: Ford has a well-known problem in Europe, but so does every other automaker. Still, I rank Ford a buy now for a few reasons, the first is that CEO Alan Mulally is on the job at least until 2014. Plus, Ford gained ground in the key China market as a territorial dispute between that nation and Japan created an opening for other foreign carmakers.


Ford's 1.8% current dividend yield isn't much, but the company just reinstated the payout last December after a five-year hiatus. Ford has a price-to-earnings growth (PEG) ratio of nearly 1.5, signaling an overvalued stock, but it's trading at less than 8 times forward earnings -- about average for the sector. I think Ford shares could see significant price appreciation in 2013, if its business stays on track.


Chrysler: Chrysler's comeback makes Fiat CEO Sergio Marchionne look like a genius. Sales rose more than 14% in November to 122,565 vehicles. Incentives remained low as well.

Chrysler posted gains in its namesake, Dodge, Ram Truck and Fiat brands, but the Jeep brand slipped 3%, in large part due to the end of Jeep Liberty production this summer.


Bottom Line: When Marchionne recently said he'd like to acquire the remaining one-third of Chrysler, European banks downgraded the stock and sent share prices reeling. Forgive the bankers' overreaction. After all, Fiat sales slid by double-digits in Italy, and Europe is still a mess.


But Chrysler is firing on all cylinders: Sales are up, new models are launching and generating a lot of buzz. The drop in Dart sales is a concern, but the all-electric Fiat 500e will take on the Nissan Leaf -- and may signal an EV strategy for Chrysler in the near future.


FIATY has a bloated PEG ratio of 3.4, suggesting it's way overvalued, but it has one of the lowest forward P/Es in the sector at around 5. I think FIATY could break out in 2013, if it steers clear of generous incentives.


To hold:

General Motors: GM held onto first place in U.S. sales, moving a total of 186,505 vehicles in November. But that's an increase of only 3.4%. Buick, GMC and Cadillac brands gained, but Chevy was flat. Dealer inventory is a bigger concern, causing GM to idle at least one plant.


Trucks were the skunk at GM's garden party, with Chevy Silverado and Colorado sales both dropping. GM officials blamed the slip on higher incentives offered by competitors, but the company's incentives were still sizable at $3,720.


Bottom Line: GM looks cheap now with a PEG ratio of 0.67 and a forward P/E of less than 7. But I'm worried about that inventory glut -- and GM's need to offer higher incentives. That's a big problem in the truck market as competition from Ford, Toyota and Chrysler grows, and the vehicle glut could dampen new launches and redesigned models.


If you're in GM now, hold -- but watch closely. Swelling inventory could be just a timing error --or it could signal GM's return to the disconnect that leveled it before the Great Recession.


Toyota: Toyota continued to post strong U.S. sales growth in November, delivering 161,695 vehicles for the month -- up 17.1% year-over-year. Classics like the Camry and Corolla/Matrix remain popular, and all of Toyota's truck nameplate gained as well.


On the downside, the Yaris subcompact slumped 61% last month -- one reason TM inked a deal with Mazda to build a subcompact for North America.


Still, Toyota's impressive U.S. gains may not be enough to offset China. Although November sales there actually improved from a dreadful October, the political spat between the two countries is far from over.


Bottom Line: If you're in TM now, hold. Its fortunes are improving after last year's natural disasters. But China production could be significantly hampered through 2014. While TM's valuation is fair and its nominal dividend is nice, the company's short-term fate is now in diplomats' hands. It's not a good time to establish a new position in TM.


As of this writing, Susan J. Aluise didn’t own any securities mentioned here.


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