Rearview Mirror: Should You Invest in Car Stocks?

Typically, we take a few minutes to offer previous stock performance from some top auto names, but should you invest in car stocks?

The auto industry is massive and nearly all-encompassing globally. Every country is impacted by this industry in some fashion, whether it’s via the mining of minerals, building cars, selling vehicles, or the entire gambit of the industry. Because it’s such a massive industry, understanding the industry and how it appears on the stock exchange is something you should have a grasp on before investing. Let’s dig in.

What do investors look at the most?

Some investors look at companies and only focus on their profits and losses, but the auto industry is a little different. Almost all income is reinvested into new projects or ventures to continue to grow each brand. Because of this reinvestment, most looking at these stocks will focus on the earnings before interest and taxes (EBIT). Analyzing this number includes the costs of R&D, manufacturing, shipping, and other operating expenses. Some automotive companies also have financing ventures under their proverbial umbrella.

Which stocks are the best to buy?

When you want to invest in car stocks, it’s wise to find an unbiased expert to offer the information desired. The right stock to buy for the next quarter might not be the same one that you should have bought last year. That said, if you’re turning to the stock market as a long-term investment solution, you’ll want to consider the historical performance data of any stock in which you might want to invest. TheStreet Quant Ratings is a good place to begin, but you should compare the data with other experts.

Can auto stocks be a good investment?

Investing in the automotive industry can be great in the short and long term. Most consumers buy and drive cars regularly, but there are times when sales and stock prices become cyclical. If you’re investing for the long term, you’ll ride out some of the downturns to reap your rewards years later. On the other hand, if you’re looking at a short-term investment, you’ll want to avoid buying into the automotive market when it’s heading downward.

Many investors in the auto industry enjoy regular, steady dividend payouts, making this a good investment most of the time.

What can cause the auto market to drop?

If you think you might want to invest in car stocks, you should understand what causes the downturn of this industry before you invest. Although consumer confidence is hard to gauge, some factors are more concrete. At times of economic weakness and rising interest rates, this industry can be slow and create a lull in stock prices. This shouldn’t be a problem for long-term, patient investors, but those looking for a fast return won’t enjoy the same confidence that things could turn around.

Other factors impacting various stock prices include changing raw materials prices, the supply chain (which has been in a state of flux since 2020), and added competition. We’ve recently seen several new EV automakers pop up, create IPOs, and enter the market. These companies can take market share from legacy automakers and cause stock prices to drop.

Understanding the risk factors should be part of what helps you decide whether or not to invest.

Are there ways to invest in alternative markets but still be in the car market?

The auto industry is vast and filled with various companies selling parts, custom upgrades, or performance products. The auto parts supply category could be a way to invest in a closely related industry without an investment in car stocks directly. These related companies usually fall under a sub-industry in the stock index, which could make them a bit more attractive to you. Auto parts supply companies are often reviewed for profits and losses directly and not EBIT.

If you want to stick to the industrial stocks, you can also step away from the auto industry and enjoy other sectors offered. You’ll find investment stock opportunities in aerospace, defense, construction machinery, heavy truck manufacturers, and agricultural and farm machinery. These stocks offer similar advantages and risks as the auto industry but offer a different customer base that could offset the cyclical nature of the auto industry.

What should you do?

The smart choice, and what many financial experts will tell you, is to diversify your money. The old saying “don’t put all your eggs in one basket” applies here. If you can afford it, spread your money around so that you invest in car stocks but also in other industries as well.