By: Karen Riccio — October 1, 2021
Bottleneck, What Bottleneck? This 'Aftermarket' Not Fazed by Chip Shortage
As we speak, the auto manufacturing industry is running out of gas. But one niche doesn’t need its tank replenished.
And that could be excellent news for you.
Before divulging how, I want to talk about why the likes of Ford, GM, Nissan, Toyota, and other carmakers have struggled, continue to struggle, and are preparing to struggle heading into 2022.
It's also why you were forced to fork over so much for that new or used car you bought recently.
You might say it’s a bit of a “tail wagging the dog” explanation. The biggest culprit? Ongoing COVID-driven supply chain bottlenecks in semiconductor chips.
I don't normally do this, but before I continue I want to alert you to a great new video by Chris Rowe — in case you haven't already watched it. It teaches you how to use a soon-to-be patented indicator that turns options into a money-making machine on steroids. Click here to watch it today!
Now back to the business at hand.
The troubles began early on in the pandemic when the shutdown — and a drop in consumer spending — caused inventories to swell at car dealerships. Auto manufacturers shut down production, and consequently cut orders for computer chips.
As expected, the handful of semiconductor plants that stayed open in early 2020, shut down too when business dried up.
Once the recovery began months later, the chipmakers reopened but couldn’t keep up with renewed demand. That created shortages, bottlenecks, and a big mess for automakers.
You see, new cars need 1,000 or more chips each to operate even the most basic functions. Automakers were left with cars sitting on the assembly line waiting for the final pieces to complete the finished products.
Hit with déjà vu, many North American chip assembly plants were again forced to temporarily shut down, leading to today’s dwindling inventories of semiconductors and plummeting auto sales.
More than 10 million cars that were supposed to be produced haven’t been, and industry losses may reach $210 billion this year, according to IHS Markit.
Like I said, it’s a mess for automakers. The number of new cars on American lots is only about 30% of pre-pandemic levels.
Industry analysts aren’t offering any good news for the near future. IHS Markit calculates that semiconductor supply won’t catch up with auto industry demand until late 2022. And shortfalls of some advanced-function chips will likely persist well into 2023.
As a result, IHS also slashed its forecast for global vehicle output in 2022, cutting it by about 8.5 million vehicles from its previous outlook.
So, in the Meantime…
Some auto manufacturers are already tweaking their 2022 plans. Shares of auto manufacturers have already been hit particularly hard: Investor favorites General Motors (GM), and Ford (F) have seen their share prices fall 17% and 15%, over three months, respectively.
Based on the semiconductor landscape, and projected bottlenecks perhaps lasting well into 2022, you’d be right to not anticipate some miraculous revival anytime soon for automakers.
Right now certain technical indicators are screaming for us to pay attention to the Auto & Parts sector.
After spending a solid month mired in the bottom 15% of the TMI’s Sector Relative Strength Matrix (one of the premium tools you’ll find on Sector Prophets Pro).
The Sector Relative Strength Matrix is one of the premium tools that comes bundled with Sector Prophets Pro, our institutional-quality sector research platform.
The Auto & Parts sector spent a solid month — from August 19 to September 16 — mired in the lower 15% of the 45 sectors we track on the Matrix. You can see that highlighted in yellow on the image below.
(Click any image to enlarge)
Now it’s up to #26, meaning it’s outperforming almost half of the industry groups we track.
What’s more, the sector is in a rising column of X’s on its Bullish Percentage Index (BPI) chart. This shows us that demand has taken control of the sector over the short term.
Additionally, the sector has flipped into X’s out of what is considered oversold (nearly “washed out”) territory. That means many if not most of the investors who were inclined to sell have already done so. The way is clear for a sustained move higher. We’ll want to be looking for that X-column to fill additional boxes and even get above the previous X-column.
Auto & Parts Sector Heaven
So, we know Auto & Parts is showing relative strength. Now, the trick is finding the strongest stocks within this sector. The first place I’m looking is in the aftermarket industry worth $210 billion today.
It makes perfect sense. Considering higher costs and lower availability on new and used cars, people are delaying new purchases and focusing on fixing up Old Betsy. People simply need to get more mileage from the cars they already own.
In this space, I like one of the biggest auto parts companies in the world — $14 billion LKQ (LKQ).
LKQ’s self-service retail operations is called LKQ Pick Your Part. It sells to private customers as well as new and used car dealerships.
Customers can buy bumper covers, automotive body panels, lights, glass products, transmissions, door assemblies, trunk lids, fenders, hoods, brake pads, discs and sensors, clutches, steering and suspension products, filters, oil, and automotive fluids, as well as electrical products, including spark plugs and batteries, and much more.
What do all of those products have in common? They hardly rely on anything chip-related. That means further supply chain disruptions shouldn’t impact this particular company’s inventory and sales.
Since, COVID and the ensuing negative impact in supply chain and automobile sales, the Chicago, Illinois-based company has steadily grown its earnings. In fact, it’s beaten analysts’ estimates for four straight quarters. And we can expect more of the same when it reports again on Oct. 27.
For the full year, projected future growth is off the charts — 44.8%, crushing the industry average EPS growth of 23.1%.
The stock is up 32% year-to-date and is trading above its 200-day moving average and less than 1% from its 50-day MA.
The image below shows the Position Key, another premium tool available at TMI’s Sector Prophets Pro data platform.
The purple arrow at the right side of the chart (Market RS) shows us that LKQ is outperforming the wider market — the Equal Weighted S&P 500.
If LKQ continues to grow its EPS, share prices will follow as they have this year. Consider LKQ as a long-term growth play.
One more reason to be bullish on LKQ is that the big hedge funds are bullish on it.
Over the past four quarters the giant institutions (which own 60% of the stock) have accumulated more than $3 billion worth of LKQ while distributing just $1.5 billion.
In other words, the big players are buying twice as much as they’re selling.
Thanks for reading, and have a great weekend! (And, Go Bills!)
Guest Editor, True Market Insiders