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5 Auto Stocks to Buy as Xi Promises to Lower Tariffs

Zacks

On Tuesday, China’s President Xi Jinping said that his government is committed to opening up its economy to foreign investors. U.S. markets welcomed his speech, which struck a conciliatory note, helping to reduce trade-related tensions. Among his many promises, Xi promised to provide better protection for intellectual property rights and reduce tariffs on imported cars.

Stocks of major U.S. automakers gained on Xi’s comments since China is a major market for U.S. auto exports. Foreign automakers using the United States as a manufacturing and export base would also gain from this move. This is why it makes good sense to pick up stocks likely to benefit from China’s upcoming reforms related to trade and foreign investment.

U.S. Auto Stocks Welcome Xi’s Comments

Speaking at the Boao Forum for Asia, Xi said China would cut tariffs on imported automobiles. Further, the foreign ownership limit on automotive companies, among others, would be raised “as soon as possible.” Currently, foreign automakers cannot own more than 50% of the joint ventures they are mandated to establish with local firms when operating inside China.


Consequently, they also have to share 50% of their profits with such Chinese partners. This is why Xi’s comments boosted U.S. auto stocks significantly. Shares of General Motors Company GM, Ford Motor Company F and Tesla, Inc. TSLA gained 3.3%, 1.8% and 5.2%, respectively, on Tuesday.

Tesla was possibly the largest gainer since it makes all of the autos it exports to China at its plant in California. Tesla’s chief executive Elon Musk has stated on earlier occasions that he wishes to retain complete ownership of any manufacturing facility it sets up in China. In a tweet after Li’s speech Xi said: “This is a very important action by China.”

China a Crucial Market for U.S. Automakers

In a tweet made less than a day before Xi’s speech Trump had criticized China’s 25% tariff on U.S. cars, emphasizing that the United States only levies 2.5% in return. Just hours after calling such a state of things “stupid trade”, Trump welcomed Xi’s comments. The President said he was “thankful” for Xi’s comments on tariffs and his “enlightenment” on intellectual property issues.

The jump in shares of U.S. auto companies is understandable considering that China is a major market for its cars. In January, General Motors said that China had remained its largest retail market for the sixth consecutive year. For Tesla, China is the second largest market in terms of revenues after the United States.

Even bigger winners of Xi’s proposed reforms could be German automakers who manufacture and export their vehicles to China from the United States. According to data from LMC Automotive, Mercedes, owned by Daimler AG DDAIF, sent 71,198 vehicles from the United States to China in 2017, while BMW, owned by Bayerische Motoren Werke Aktiengesellschaft BAMXF, sent 106,971 vehicles.

Our Choices

Markets have responded enthusiastically to President Xi’s comments, especially automotive stocks, which stand to benefit significantly from the reforms proposed by the Chinese president. Not only would they have to pay lower duties on imported vehicles, they would also be able to hold a larger stake in their Chinese joint ventures.

U.S. auto companies, related organizations and foreign automakers exporting to China from the United States make for good investments at this point. However, picking winning stocks may be difficult.

This is where our VGM Score comes in. Here V stands for Value, G for Growth and M for Momentum and the score is a weighted combination of these three scores. Such a score allows you to eliminate the negative aspects of stocks and select winners. However, it is important to keep in mind that each Style Score will carry a different weight while arriving at a VGM Score.

We have narrowed down our search to the following stocks based on a good Zacks Rank and VGM Score.

Allison Transmission Holdings, Inc. ALSN is engaged in the manufacturing of fully-automatic transmissions for medium- and heavy-duty commercial vehicles, medium- and heavy-tactical U.S. military vehicles and hybrid-propulsion systems for transit buses.

Allison Transmission has a VGM Score of B. The company has expected earnings growth of 29.5% for the current year. The Zacks Consensus Estimate for the current year has improved by 18.2% over the last 60 days. The stock has a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

BorgWarner Inc. BWA is a global leader in clean and efficient technology solutions required for combustion, hybrid and electric vehicles.

BorgWarner has a Zacks Rank #2 (Buy) and a VGM Score of A. The company’s expected earnings growth for the current year is 9.7%. The Zacks Consensus Estimate for the current year has improved by 0.9% over the last 60 days.

Cummins Inc. CMI is a leading global designer, manufacturer and distributor of diesel and natural gas engines, electric power generation systems, and engine-related components, fuel systems, controls and air handling systems.

Cummins has a Zacks Rank #2 and a VGM Score of A. The company has expected earnings growth of 18.5% for the current year. The Zacks Consensus Estimate for the current year has improved by 0.3% over the last 30 days.

Standard Motor Products, Inc. SMP is one of the leading manufacturers, distributors and marketers of automotive replacement parts in the United States.

Standard Motor Products has a Zacks Rank #2 and a VGM Score of B. The company has expected earnings growth of 18.4% for the current year. The Zacks Consensus Estimate for the current year has improved by 2.4% over the last 60 days.

Bayerische Motoren Werke Aktiengesellschaft is a multi-brand automobile manufacturer that focuses on the premium segments of the worldwide automobile and motorcycle markets.

Bayerische Motoren Werke has a Zacks Rank #2 and a VGM Score of B. The Zacks Consensus Estimate for the current year has improved by 1.1% over the last 30 days.

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