Having a child who is turning 16 soon tends to focus the mind. The thought of your son getting behind the wheel — alone! — makes you think long and hard about what kind of car he should have access to, and what you can do to make him safe.
So my wife, Kim, decided recently that it was time to part with her Ford Mustang. Several days of research, test drives and wheeling and dealing later, we settled on an Infiniti and signed the papers Tuesday.
I love the car. She loves the car. And I think we will all sleep a little sounder when he has to occasionally borrow that vehicle later this year!
The whole experience got me thinking about the auto sector, which quite frankly has been a key driving factor for the U.S. economy. Easier credit, cheaper gas and the general post-Recession rebound have all combined to drive auto sales to multi-year highs!
U.S. car and truck sales rose to an annual rate of 16.7 million last month. That was a 9.2 percent rise from 15.3 million in the year-ago period. Considering 2014 was the best year for sales since 2006, that momentum is encouraging.
|Ford’s F-Series had its best sales in 11 years.|
Leading U.S. producers did exceptionally well, with Ford (F, Weiss Ratings: B) notching its best F-Series truck sales in 11 years. General Motors (GM, Weiss Ratings: B) sold 29 percent more GMC trucks in January than a year earlier. Several foreign companies — from Honda Motor (HMC, Weiss Ratings: C+) to Infiniti-maker Nissan Motors (NSANY, Weiss Ratings: B) — also had their best January ever!
In fact, GM is doing so well that big money investors are now pushing the company to return much more capital to shareholders. The carmaker just raised its quarterly dividend by 20 percent to 26 cents per share.
A key official who helped restructure the carmaker, Harry Wilson, is also joining the board so he can propose GM buy back $8 billion worth of shares. That’s shocking when you consider that just six years ago, GM was in such dire shape it filed for bankruptcy and needed a U.S. government bail out!
So can the strength continue? Will carmakers continue to prosper, and can you make money targeting their shares (or the shares of their suppliers)?
Well, it really does go back to employment. I’ve noted that the jobs figures are continuing to improve, in some cases to the best levels in years. That’s a positive factor for car demand. So is the plunge in gas prices to around $2 a gallon from almost $4!
Easier credit is also helping grease the wheels, if you’ll pardon the pun. We could see more subprime auto loans issued this year — around 7 million — than at any time since 2007.
The issuance of securities backed by high-risk auto loans has also more than quadrupled in the past four years. That makes it easy for dealers to fund car purchases, and lenders to issue and sell off the loans they make to Wall Street investors.
I don’t foresee a change in the employment trend for now. So that remains a positive. I do think gas prices may have seen their lows, even as they won’t surge right back to $4. So that’s going to be more of a neutral factor going forward.
The biggest issue is credit. If lenders go too hog-wild with subprime auto loans — just like they did with subprime mortgages — it’s going to end in disaster. I don’t think we’re at the tipping point yet, a la summer 2005 in housing. But I’ll be keeping a close eye on the credit markets for signs we’re going over the edge.
In the meantime, you can probably squeeze some more profits out of this move. There is an exchange traded fund called the Nasdaq Global Auto Index Fund (CARZ) that tracks the sector. But it’s not incredibly liquid or actively traded.
A better bet may be to focus in on the more highly rated, healthier names in the sector. You can use the Weiss Ratings to get some guidance. Or just keep an eye on my Safe Money Report, where I will make specific recommendations when the time and price is right! Now I’m off to take the Infiniti for another spin — if I can convince my wife to hand over the keys!
Until next time,