Martinrea (MRE.TO)

Doesn’t like the general dynamics of this industry, because they tend to be very concentrated and very dependent upon 1 or 2 customers. He has avoided this one like the plague.

He still likes this. It has been frustrating, particularly this year. People really seem to have priced the next auto downturn into the stock. Currently trading at 6X this year’s earnings and 5X next year’s. They are one of the best positioned for the increasing use of aluminum. Very strong management. Feels this is exceptionally cheap.

An auto parts manufacturer. All these manufacturers are trading at pretty low multiples. Typically, it is a lower type multiple industry. An overhang on the group right now is that auto production has likely peaked at 18 million units. There are increasing incentives in a lot of the pickup truck space. Europe has been very slow to turn. A well run company, and you could probably hold it here longer-term. Potentially, the election could be a negative for the group.

This has a 1.4% dividend yield. The stock is getting a little better. The auto sector is improving. He would prefer something like General Motors (GM-N) which gives a 4% yield, with a dividend that will grow 20% a year for the next 3-4 years.

Magna (MG-T), Linamar (LNR-T) or Martinrea (MRE-T)? His preference has always been for Magna or Linamar, and as of late it has been for Linamar. This is certainly cheap here, but their plant is older and doesn’t quite have the oomph behind it that the other 2 do.

They continue to deliver on earnings. Trading at 5X earnings. When you see that, it tells you that nobody believes there is any growth in the industry. They are paying down debt. Has great exposure to the growth of aluminum in the car. They’ve spent money on new platforms in the last couple of years, and are starting to reap the benefits. Probably not a lot of downside. The additional worry for them is the Trump election. They have plants in Mexico and do a lot of business with Ford (F-N). (Analysts’ price target is $11.11.)

In the last week, most auto parts companies have reported, and this one had an OK quarter. These stocks react very quickly to a changing business mix and sales, because they are all exposed to the different manufacturers in different weights and different parts and different margins. When we are seeing auto sales at the 17-18 million units a year, are we at peak auto? He would be cautious on this.

MG-T is his goto name, but he likes the auto parts cycle, although you have to be selective.

(Top Pick Oct 9/15, Down 25.38%) They beat their estimates. The growth has started to come back after a couple of years. They bought great aluminum factories and that metal is becoming popular in autos. The next recession in autos is already priced into this stock.

He follows the industry and owns LNR-T because it is better managed and initiates new programs for the auto industry. It has higher earnings growth. He prefers LNR-T.

They are expanding in Mexico and China. They have a new management team that is doing all the right things. It is trading at 5 times this year’s earnings. It is by far the least extensive compared to LNR-T and MG-T. It is still a tiny company that is making a turnaround.

Move to Linamar (LNR-T) or Magna (MG-T)? A great question, because these 2 are trading at rock bottom multiples. This is a reflection of the North American auto market being at a deflection point. It has more than fully recovered since the recession, and now we are starting to see some potential declines in US auto sales. The market is reassessing their growth potential for these stocks. Thinks that these will remain quite volatile in the near term. He would avoid the sector at this point.

What he likes is that the auto sector is pricing in the next recession. People are assuming the auto industry is going into a big downturn. This is trading at a ridiculously low valuation at 3X operating cash flow and 7X forward earnings. They are hitting their numbers and the earnings are growing. This is the best aluminum play out there in terms of the lighter vehicle move. Good European exposure. Recently added a lot of new programs and plant facilities and are now seeing the benefits of that. Dividend yield of 1.35%.

(Market Call Minute.) The sector is not going to roll over, but Magna (MG-T) is a better company. (See Top Picks.)

He sold a month ago. Sentiment got bad regarding the peak of auto sales and Tesla as a competitor. He would hold on to it. It is slow growth. If they bring down costs then there is margin expansion. He plans to revisit it in a couple of months.