Magna Int'l. (A) (MG.TO)

The auto parts space is in a precarious position with protectionism and so on. He does not like to be in an industry where stocks can move around on a Tweet. You have rising gasoline prices and rising interest rates. It is a double whammy.

This is an outsourcer, producing $1.4 billion of free cash flow. Has a 6% free cash flow yield, and can end up paying off their debt easily. Has about a 21% ROE on a trailing basis. Earnings are up 33% on a 22% increase in sales. 5.3X enterprise value to EBITDA on a trailing basis. Their cash flow is forecast to grow at 11% in 2017. Dividend yield of 2.6%. (Analysts’ price target is $65.33.)

When are we going to stop buying cars? It is a cyclical stock. His model price is $101.47, or a 68% upside. But if we got into a soft patch on auto sales, it would go back to $47 very quickly. If it went down to $56.77 he would be out of the stock.

This is really a call on the auto cycle. 2017 will probably be another year of high sales, but not getting any higher. The stocks are trading like they are consumer cyclicals, and are kind of rolling over. Buying today, he is not sure you are going to make 20% or anything like that.

(A Top Pick Nov 18/15. Up 3.79%.) Everybody expects the auto parts sector to peak and the US auto sales to peak and start going down. We haven’t seen that yet. This company sells to everybody. This is still inexpensive and still has room to go up.

This broke out above resistance at around $58, and he is looking for it to come back and test. The upside target would be about $80. Automakers are doing well, and this one has new contracts coming in. You might wait within the month and try to get the best price possible at around $57-$58. It should be a good name for the next 6-8 months.

This is on his radar. The auto cycle in North America looks a little bit long in the tooth, but in Europe and other parts of the world things are looking up. This company does a lot of business in Europe. The company has plants throughout North America, a lot of them in Mexico.

Switch from Linamar (LNR-T)? That would be 6 of one and half a dozen of the other. They are both in the auto parts business. If you like auto parts, they are both good companies and have performed with the sector.

LNR-T vs. MG-T. He owns LNR-T because he found it cheap vs. the organic growth it was showing. It got cheap and attracted value investors. LNR-T have been executing well and done well with organic growth.

This is really a value play. Its current valuation is pricing in a deep recession. There is no question that the auto space has its issues. It is one thing to buy a great business and a great industry, but it is another what you pay for it. He would rather buy a business that has some good and some bad, but pay a price that is discounting the good that is there. That is what he sees with this company. Dividend yield of 2.19%. (Analysts’ price target is $64.52.)

(A Top Pick March 31/16. Up 12.9%.) The concern at that time was that we were at peak auto, and he didn’t think that was the case. It was very cheap within the group, and has a very good business mix. It has a lot more to go.

An economically sensitive name, and he thinks this is the right environment for that. Up until very recently, the whole group was trading at 20 year lows, at levels that would indicate we were coming into a recession, and he doesn’t think we are. Still very cheap relative to its peers. It has good growth and a buyback. On Q3 they beat in Europe and were in line in North America. Its Getrag acquisition is performing ahead of expectations. Dividend yield of 2.18%. (Analysts’ price target is $64.52.)

It has been doing quite well recently. They are largest auto parts manufacturer in Canada, but have well balanced exposure to North America, Europe and Asia. It is a play on the continuation of the auto parts cycle. It trades at under 8 times earnings with peers closer to 12. (Analysts’ Target: $64.52)

Magna (MG-T) or Linamar (LNR-T)? His model price gives a 71% upside on this. He doesn’t really like this space. We have sold a lot of cars in the past. However, if we get growth again, that would be one argument for them. He would choose this one over Linamar.

Great, long term chart. Had a pullback over the last 18 months. A great time to get involved. Trading at around 7X earnings. The #2 auto parts company globally. A real innovative company that continues to grow through thick and thin. Cheap. Great balance sheet. Buys back stock. Dividend yield of 2.39%, and you will probably see an increase in the next quarter. (Analysts’ price target is $64.52.)