Value Investing / Main Index / previous / next

December, 2000


Research by Tweedy, Browne Company LLC and others indicates that stock markets tend to overreact both to good and bad news and that the long-term earnings potential of both a random selection of formerly poor earnings companies and of excellent earnings companies tends to be "just" average. While average earnings for a previously superior earnings company's shares leads generally to much lower prices, the same average earnings for a once bad earnings company's shares leads to significantly higher prices, everything else being equal. The markets love positive surprises and hate negative ones.

These facts may be relevant currently with respect to two industries: auto/truck and replacement auto parts.

For a variety of reasons, among them concerns over a slower economy, higher interest rates, higher gasoline prices, the recent presidential election limbo, and pessimism about the auto parts industry's viability (in an era when highly sophisticated, computerized vehicles may lead car and truck owners to turn to dealers, rather than separate, replacement auto parts companies, for help with auto repairs), both automobile/truck company shares and those of replacement auto parts companies have been beaten way down over the last many months.

In fact, they seem to be so out of favor as to be discounting not just a recession but also high inflation and a conversion from the internal combustion engine to environmentally friendly vehicles.

Unless you think that folks will no longer be buying more conventional cars and trucks and, when times are not so good, also no longer trying to save money by keeping them on the road with new parts, the sell-offs appear to be overdone.

This is not to say that the stock prices of these companies will not continue to go down. They may, in the short-term, go either down or up. We do not advocate trying to time the market, much less single industries. But we do suggest that, from a value-oriented, contrarian point of view, there are bargains out there now. In the view of "Grant's Interest Rate Observer," it may be time to begin nibbling at the best values, with a gradual approach to major purchases, to be held for the long-term.

The very finest steals, though also the highest risks, appear to be in the replacement auto parts industry alone.

Based on "Value Line," 12/8/00, pp. 101-115, even if you omit the very riskiest of these, Federal-Mogul, the 3-5 year projected return of the other auto parts companies in Value Line's basic (1700 stock) investment survey, on average, is 274%. However, they are extremely cautious about such investments at this time, ranking them now, as they did way back in June, at the very bottom of their recommended industries' timeliness rankings (92nd out of 92). Unless the entire industry is going to disappear from our economy, they can seemingly only go up from here, over the long-term.

A risk-averse investor (and we fall into this camp) might take only the most promising of both the auto parts and auto/truck industry stocks and form a small portfolio. While we strongly urge each reader to do his or her own research before buying, our recommendations, then, are as follows:

Stock Symbol Industry Recent Price/Share 3-5 Year Projected Return
Ford F auto/truck $24 88%
General Motors GM auto/truck $51 95%
Navistar Int'l NAV auto/truck $32 153%
Genuine Parts GPC auto parts $19 138%
Standard Motor Products SMP auto parts $7.2 490%

Combining the two apparently best positioned replacement auto parts companies with the three suggested auto/truck companies, gives an average 3-5 year projected total return of 193%. This compares favorably with "Value Line's" (12/8/00) 3-5 year projected total return, for all of their basic 1700 surveyed stocks, of just 95%.


Larry is not a professional. Don't take him seriously!

Actually, the investment article provided here is for general information only and should not be considered as professional advice, a solicitation to buy or sell any security, or the Word of God. Investors are encouraged to do their own research while considering their personal goals and circumstances, or consult their own professional financial advisors, before making investment decisions. Neither Larry nor LARVALBUG will be liable for any losses sustained by any visitor to this site.

Value Investing / Main Index / previous / next