Martinrea (MRE.TO)

(A Top Pick Nov 16/16. Up 88%.) If you have a cheap stock, just be patient with it. In this case, this was just a cheap stock trading at about 6 or 7 times earnings, 3 times operating cash flow.

They use Memex as real-time manufacturing software to improve productivity. Shares have gone up and there is more to come. Dividend yield of 1%. (Analysts’ price target is $15.50.)

They are doing a great job. They ended up having earnings up 27% last report. They are the best earnings to date. The stock is cheap and attractive. (Analysts’ target: $15.50).

It has done well. Auto parts. It is probably still good value here. They are gaining market share. His concern is the cycle nearing the end. He is concerned we are getting close to the end of the cycle. The business is being well managed.

The valuation is better than others. He was out for a number of years while the auto industry went through some changes. They are a leader in lightweighting cars, in making cars more fuel efficient. (Analysts’ target: $14.00).

Linamar (LNR-T), Magna (MG-T) or Martinrea (MRE-T)? He doesn’t find the overall environment for auto parts manufacturers very constructive. US auto sales are at their highest levels, running north of 17 million units. This is the 2^nd or 3^rd year that has been going on. There is the NAFTA free trade agreement in question. Also, auto loans are coming into real focus, which in his view, are not very positive. There is some debate as to how these companies can move from an internal combustion engine to an electric car. This is too dangerous a time to be going in right now.

Canadian auto parts supplier. This has had its struggles over the last decade or so and they’ve gone through a difficult restructuring period. They are impacted by the global level of vehicle demand, particularly in North America. The OEM inventory levels being carried now is higher, which means it will push back on the suppliers, which is an issue. The valuation is reasonable.

This one is cheap and has a little more operational leverage than the other two in the group. It has a reasonable return on equity. It is cheap on a price to earnings ratio. It is a reasonably cheap company with some operating leverage. (Analysts’ target: $13.00).

In general, the US consumer is in pretty good shape. There has been a lot of concern in the last year that we are looking at possible peak auto for the cycle. It doesn’t look like that is the case, but auto parts companies and auto makers had a difficult time. The group that people were focused on within that sector were the auto parts retailers. In the last 2-3 months, the auto parts companies and some of the OEMs have started to come on. However, we do face a risk of some kind of border adjustment tax, and that could be risky for Canadian producers. He would prefer something like Delphi Automotive (DLPH-N).

He likes the auto parts manufacturers. This is probably the one with the most upside. It is kind of small and hasn’t done great except for a pop in the last month. They had some issues about management ability, etc., but overall it consistently earned an 8% ROC. If they just keep doing that, he shows significant upside, into the mid-teens.

CLS-T vs. MRE-T. It seems CLS-T has business picking up, but MRE-T is stuck in some kind of a glut that they can’t break out of. He refers CLS-T.

The auto space is battling the views that last year was a peak year for auto sales. A lot of people are thinking we are going to have a slowdown at some point. His view is that the consumer is improving globally. When he looks at a sector, he tends to look at securities that are acting the best. Picking a Canadian name, he would probably pick Linamar (LNR-T) or Magna (MG-T). However, the group is slowly improving. In a healthy market, the market should broaden, more and more stocks should participate, and this company looks like it has made the turn here. You are probably okay.

There are worries about the auto sector, and this has been under additional pressure, but he likes the valuation. When you get a stock trading at 5 or 6 times forward earnings, and 3X operating cash flow, you are already assuming the worst. They have a lot of downside protection. He likes the operations. They probably have the best exposure to aluminum in the automobile, which is increasing. European operations are doing well. Capacity is increasing and they are getting higher margins from that. Dividend yield of 1.38%. (Analysts’ price target is $11.68.)

He doesn’t know the financials, BV or the debt. Right now, with all the NAFTA agreements possibly being torn up, this company could be impacted. Any time companies are strongly impacted by changes, you have to think about what that is going to cost them. In this case, it may be negatively impacted. Things are way more in flux than before.

The chart shows a definite trend of lower highs and lower lows. This is now in a downtrend, and he would not buy it.