Automotive industry is known to be a cyclical industry that moves in a series of peaks and troughs. Nevertheless, automotive OEMs as well as auto ancillary stocks have made tremendous wealth for investors in stock market and many have given multibagger returns. This is especially true for undervalued auto ancillary stocks. For an experienced eye, it doesn’t take long to recognize the potential in a sector faced with lots of headwinds and pessimism all around.
Not too long ago, auto was one such sector where the consensus was to avoid it. However, things are changing for good now with metal prices coming down while other commodities are also taking a breather. Automotive sales numbers during the latest months of May and June have demonstrated that there is ample latent demand and sales growth is likely to gather momentum if auto OEMs pass on some commodity gains to buyers.
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Multibagger Auto Ancillary Stocks?
At this juncture, it appears to be more prudent to look at the sector purely from the undervaluation perspective instead of eyeing multibagger returns. If some of these indeed turn out to be multibagger stocks, that’s great but mean reversion to historic valuations with modest gains is pretty much a certainty.
We set up a simple screen to identify stocks which are undervalued on traditional metrics like debt by equity, enterprise value by sales and return on capital employed (ROCE). At the same time, we didn’t want to get stuck with companies when very low and no sales growth so revenue performance in recent quarters was also an important parameter for this exercise. Here are the top undervalued auto ancillary stocks based on these parameters.
Undervalued Auto Ancillary Stocks
|Stock||Price||P/E||1Y Price (%)||P/S||P/BV||D/E||Q/Q Sales (%)||EV/S||ROCE|
|Steel Strips Wheels||825.0||12.6||66.7||0.7||2.7||0.7||51.9||0.9||23.4|
|L G Balakrishnan||655.0||9.0||44.7||1.0||1.8||0.1||12.0||0.9||29.0|
|Lumax Auto Tech.||204.8||19.9||29.4||0.9||2.6||0.3||7.5||0.9||18.4|
P/E – Price to Earnings Per Share (EPS)
1Y Price (%) – Stock price growth in last 12 months
P/S – Price to Sales ratio
P/BV – Price to Book Value ratio
D/E – Debt to equity ratio
Q/Q Sales (%) – Sequential quarterly sales growth
EV/S – Enterprise Value to Sales ratio
ROCE (%) – Return on Capital Employed displayed as a percentage
As one can see, some of these undervalued auto ancillary stocks have already delivered strong price performance in the last 12 months. To some investors, it may appear to be the case of a lost opportunity. However, this notion can’t be further from truth. Given the fact that the automotive industry is a cyclical one and it has been in dumps over the last 2-3 years, the recovery currently underway is likely to be robust and longer in duration than the previous upcycles.
At the same time, it makes sense to understand that not every stock in a portfolio can become a multibagger. So instead of looking for multibagger auto ancillary stocks, the approach of looking for decent upside stocks is likely to be more prudent.
The key would be to take calculated risks and not go overboard with a single or few stocks. In any case, it is always advisable to go with a set of at least 10 – 15 stocks in order to compensate the underperformance of few stocks (and there are always underperformers).
Please note that this list of undervalued auto ancillary stocks is not an investment advice and is shared as an intellectual exercise to identify potential winners. One can still lose money in undervalued stocks as they can go bust or remain undervalued for a long time. Therefore, it is advisable to contact your financial advisor before buying these stocks.