There is one fairly large and two small (in terms of number of firms) -- but closely related --industries that appear very attractive this week. The first is Auto original equipment manufacturers -- the people who make the parts that go into cars. It is a fairly large industry with 30 firms, even if many of the firms are relatively small. However, of those 30 firms, 9 of them hold the coveted Zacks #1 Rank, or Strong Buy, and another 7 hold a Zacks #2 Rank, or Buy.Since only the most attractive 5% of all firms are awarded a Zacks #1 Rank, and only the next 15% get a Zacks #2 Rank, having 30% of the firms in the industry hold a #1 and an additional 23% hold #2 ranks is enough to sit up and take note. Overall, the industry is in a tie for 15th place among the 255 industries we rank, with an average score of 2.20 versus 2.27 last week. That was enough to improve their placement by six spots.
The two small but closely related industries do even better, both tied for 8th place with average scores of 2.00, which are unchanged from last week. But with a few small industries showing improvement, this was a decline of three spots from last week. These industries are Domestic Autos, and Engines. Each has only two firms in the industry, with one #1 and one #3.
The #1 firms are ones you have probably heard of: Ford (F) andCummins (CMI), while the #3s were a little bit more obscure,Paccar (PCAR) and Westport Innovation (WRPT). (OK, one is a bit smaller and more obscure than the other; PCAR is one of the world’s dominant producers of big trucks).
It is worth noting that the Foreign Auto industry does not stack up nearly as well, coming in 176th place, a decline of 60 spots, with an average score of 3.11. Out of 9 firms, there is only one Zacks #1 Ranked firm -- Tata Motors (TTM) -- among foreign carmakers.The first table below shows all the Zacks #1 Ranked firms in these industries, along with their valuations and recent changes in their mean estimates (one of the primary drivers of the Zacks rank). The companies range from large caps like Ford and Cummins and range all the way down to a micro-cap with less than $75 million in total market capitalization.
There is a wide variation of valuations based on this year's earnings, but all are expected to show strong earnings growth into next year, and tend to have well-below-market P/Es based on next year’s earnings. However, this is one of the most cyclical areas of the market. How cheap they really are will depend on just how long this economic recovery lasts. If it is sustained, these stocks will prove to be very cheap at these levels; if it falters, then the low 2011 P/Es will prove to be a classic value trap.
While Auto sales have been on the upswing relative to very depressed levels in 2009, they are still running far below historical levels. So far this year, sales have been running at a rate of about 11.5 million cars a year, up from under 10 million in 2009. But before the recession, car (and light truck) sales tended to run at a rate of about 16.5 million a year.
The annual scrap rate is about 13.5 million cars a year, although that has also probably come down during the recession. While we are probably not going back to the historical level for car sales anytime soon, it does seem like demand is still pent-up, which could give this cycle plenty more room to run on the open road.| Company | Ticker | Market Cap ($ mil) | P/E Using Curr FY Est | P/E Using Next FY Est | % Change Curr FY Est - 4 wk | % Change Next FY Est - 4 wk | Current Price |
| Ford Motor Co | F | $41,463 | 9.26 | 7.6 | 32.37% | 14.34% | $12.31 |
| Cummins Inc | CMI | $14,421 | 19.58 | 13.61 | 46.13% | 26.90% | $71.76 |
| Tata Motors-Adr | TTM | $8,985 | 9.86 | 7.9 | 61.70% | 29.86% | $18.73 |
| Magna Intl Cl A | MGA | $8,044 | 15.28 | 11.81 | 49.22% | 16.50% | $71.92 |
| Borg Warner Inc | BWA | $4,702 | 16.33 | 12.28 | 40.87% | 17.08% | $39.96 |
| Autoliv Inc | ALV | $4,277 | 10.44 | 9.57 | 7.80% | 3.69% | $50.15 |
| Trw Automtv Hld | TRW | $3,909 | 9.63 | 8.45 | 50.47% | 27.54% | $32.90 |
| Lear Corporatn | LEA | $3,204 | 19.47 | 11.05 | 26.55% | 6.21% | $74.12 |
| Wabco Holdings | WBC | $2,172 | 18.79 | 12.38 | 40.52% | 24.19% | $33.89 |
| Tenneco Inc | TEN | $1,409 | 20.21 | 10.35 | 35.81% | 21.09% | $23.70 |
| China Auto Sys | CAAS | $542 | 18.63 | 16.3 | 17.98% | 13.68% | $20.05 |
| Strattec Sec Cp | STRT | $72 | 20.56 | 16.54 | 5.94% | 11.77% | $22.00 |
| Sector | "This Week's Zacks Rank " | "Week ago Zacks Rank " | "FY10 Revisions Ratio " | "FY10 Estimates Revised Up " | "FY10 Estimates Revised Down " | "FY11 Revisions Ratio " |
| Auto-Tires-Trucks | 2.44 | 2.5 | 8.46 | 203 | 24 | 6.48 |
| Conglomerates | 2.64 | 2.56 | 12 | 108 | 9 | 16.33 |
| Retail-Wholesale | 2.68 | 2.67 | 3.54 | 906 | 256 | 3.99 |
| Consumer Discretionary | 2.72 | 2.73 | 3.55 | 858 | 242 | 4.02 |
| Industrial Products | 2.77 | 2.83 | 2.48 | 509 | 205 | 3.53 |
| Computer and Technology | 2.81 | 2.8 | 2.4 | 1985 | 826 | 2.62 |
| Basic Materials | 2.83 | 2.81 | 1.74 | 462 | 265 | 2.16 |
| Transportation | 2.86 | 2.92 | 2.46 | 510 | 207 | 2.92 |
| Consumer Staples | 2.97 | 2.99 | 1.84 | 291 | 158 | 1.79 |
| Aerospace | 2.98 | 2.95 | 1.83 | 132 | 72 | 4.9 |
| Construction | 3.05 | 3.11 | 1.81 | 233 | 129 | 1.79 |
| Business Services | 3.06 | 3.08 | 1.47 | 387 | 263 | 1.87 |
| Medical | 3.11 | 3.12 | 1.33 | 1246 | 937 | 1.09 |
| Oils-Energy | 3.13 | 3.14 | 1.16 | 974 | 842 | 1.15 |
| Utilities | 3.15 | 3.17 | 1.13 | 324 | 288 | 1.07 |
| Finance | 3.17 | 3.15 | 1.38 | 1921 | 1393 | 1.33 |
In evaluating the Zacks Industry Ranks, you want to see two things: a good overall score (low, meaning more Zacks #1 and #2 Ranked stocks than #4 or #5 Ranked stocks) and some improvement the relative position from the prior week. It is also helpful to understand exactly what the Zacks Industry Rank is.
The Zacks Industry Rank is the un-weighted average of the individual Zacks ranks of the firms in that industry. It does not matter if the stock is the 800 lb gorilla that dominates the industry or some very small niche player in the industry -- they have the same influence on the industry rank.
The same obviously goes for the bottom of the list as well. If there are 50 firms in the industry, and it ends up at one of the extremes, that means there has to be something pretty significant going on. Thus, I do not always focus on the very highest rated industries, but on the highest rated ones in which there are a large number of firms.
Click here for the Zacks Industry Rank List:http://www.zacks.com/zrank/zrank_inds.php
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