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Revving Up Your Investment: Auto-Parts Stocks

In recent years, the cost of owning a vehicle in the United States has skyrocketed, mirroring the upward trend in various other expenses. Factors such as an expanding money supply, persistently high interest rates, and supply-chain disruptions have contributed to a financial burden for new car buyers. While the prices of used vehicles have reached historical highs, new cars have become prohibitively expensive, especially for middle-class Americans. In August, the average transaction price for a new car was a staggering $48,451, with additional interest payments further increasing the financial burden on buyers.

The situation is exemplified by individuals who shell out over $1,000 per month in car payments, highlighting the immense economic strain. However, in times of market distortions, opportunities often emerge for astute investors. This article delves into an often-overlooked sector of the auto market that presents substantial potential for investment returns.

Auto-Parts Stocks: The Rationale Behind the Bet

Currently, negotiations between the United Auto Workers (UAW) union and the prominent Detroit-based automakers—Ford (NYSE:F), General Motors (NYSE:GM), and Stellantis (NYSE:STLA)—are mired in a protracted stalemate. Tensions have escalated to a point where Ford CEO Jim Farley has accused the UAW of “holding the deal hostage over battery plants,” a claim promptly rebuffed by UAW President Shawn Fain, who responded, “I don’t know why Jim Farley is lying about the state of negotiations.”

The ongoing standoff is taking a considerable toll on the “Big Three” automakers. General Motors and Ford have recently announced the “indefinite layoff of another 500 workers at four Midwestern plants” as a direct result of the strikes, with Ford and General Motors accounting for 330 and 164 of these layoffs, respectively. This reduced workforce will inevitably lead to increased labor costs and likely result in higher prices for new cars.

One anticipated outcome is a scenario where many consumers opt to hold onto their existing vehicles for more extended periods due to the financial barriers to purchasing new ones. This, in turn, would benefit automotive component sellers. Notably, this potential boost to auto-parts stocks has not been fully factored into their current valuations.

Invest in the Components, Not the Vehicles Themselves

While some traders may be tempted to invest in Ford, General Motors, or Stellantis stocks, it is advisable to exercise caution. It is prudent to wait until the final terms of the agreements between the automakers and the UAW are disclosed before considering any trades with automaker stocks. The market’s response to these terms can be highly unpredictable, even if the terms appear favorable.

Furthermore, the financial repercussions of the ongoing negotiations will undoubtedly impact the future earnings reports of the Big Three. A comprehensive assessment of the damage is unlikely to occur until 2024. Therefore, a wait-and-see approach is the most rational strategy for the time being.

Exploring the “Big Three” Auto-Parts Stocks

Similar to the Big Three automakers, there are three prominent U.S.-based publicly traded auto-parts retailers. All three companies boast market capitalizations in the billions and reasonable price-to-earnings (P/E) ratios.

The largest among them is O’Reilly Automotive (NASDAQ: ORLY), with a market capitalization of $54 billion and a trailing 12-month P/E ratio of approximately 25. Next in line is AutoZone (NYSE: AZO), trading at 19 times earnings and featuring a substantial $45 billion market cap. Bringing up the rear is Advance Auto Parts (NYSE: AAP), with a compelling P/E ratio of around 9 and a somewhat smaller market capitalization of roughly $3 billion.

For investors seeking value and income opportunities, Advance Auto Parts stock stands out due to its significant price decline and a forward annual dividend yield of 1.79%. However, for those preferring a less risky investment, O’Reilly Automotive stock and/or AutoZone stock are worth considering. In any scenario, these auto-parts stocks could emerge as the ultimate beneficiaries, regardless of the outcome of the ongoing union-automaker negotiations.

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