(Please enjoy this updated version of my weekly commentary published March 28th, 2022 from the POWR Growth newsletter).
First, let’s review the past week:
Last week, the S&P 500 was up a staggering 6.9%. And this week that momentum has continued as we are higher by another 2.6%. However, I do think it’s important to note that strength isn’t as broad-based as last week as the Russell 2000 is up only 0.5% over the same period.
As noted in the Intro, this really is an important inflection point as we approach the top-end of the range. A week ago, it seemed simple that getting more defensive at the top of the range makes sense in the same way that it made sense to get a bit more aggressive at the bottom of the range.
It’s important to acknowledge the relentless nature and bullish price action of the rally which has been reminiscent of so many previous market bottoms.
So, I think it’s appropriate to tweak our gameplan given this development.
Instead of being proactive, we will remain patient and wait for a rejection of these levels before taking action. And, we also have to be open to the possibility that a break above this range could mean throwing this plan out the window and getting more aggressive.
To sum it up: Last week I was about 75% in the camp that this is a bounce within a range and 25% that this was the start of a new multimonth trend. Currently, I would say I am at 55% bounce in a range/ 45% start of a new, multimonth trend higher.
1 More Trend
One use of these commentaries has been to talk about powerful, underlying trends in the economy. Often, these trends are disconnected from issues like global growth or monetary policy that are more difficult to figure out.
But, they can provide the most upside as these trends lead to above-average earnings growth.
In recent commentaries (POWR Growth and Stocks Under $10), we have discussed:
- Housing
- Gold
- Auto Loan Defaults
- Travel
- Energy
- Growth at a Steep Discount
In today’s commentary, I want to follow-up on the auto loan default theme by talking about improvements in auto production, and why I think auto parts stocks could have major upside over the next year.
So first, let me share what I wrote about auto loan defaults in last Thursday’s commentary:
So many used cars are bought with financing. Buyers, today, are paying a higher than normal price which could quickly be down 20 to 30% in less than a year if the market reaches a healthier equilibrium.
Financial conditions have gotten tighter with the Fed’s rate hike and climb in Treasury yields. Higher costs are eroding discretionary spending and likely putting pressure on low-margin businesses.
While the economy is doing well on an aggregate basis, it’s likely that certain pockets of people and businesses are feeling immense pain. And many of these loans will go bust.
To be frank, I’m not even sure about the best way to take advantage of this development. One takeaway is to reduce exposure to companies with high amounts of auto loan debt. Another is that this probably isn’t the best time to buy a car.
Where I think the opportunity lies is on betting on increased auto production. Q4 earnings for automakers were pretty bad as production declined due to omicron issues and more chip backlogs.
However, there is a light at the end of the tunnel as all companies seemed to be in agreement that the worst was behind us and that full production could resume by the middle of next year.
Pre-pandemic, we were making about 200,000 cars per month in America. This hit a low of 86,000 in September 2021 and is currently at 127,000. I believe the gradual recovery in this figure is going to be very bullish for auto parts stocks.
Many of these stocks are down 40 to 50% over the last couple of months. They have very low valuations which means the stocks have more upside given the potential for earnings growth and multiple expansion.
I have my eyes on 2 auto part stocks – one is a well-known brand that has more than 100% upside if auto production does return to full capacity and the second is a smaller, more speculative stock that is a play on increased EV production.
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All the Best!
SPY shares were trading at $461.39 per share on Tuesday afternoon, up $5.48 (+1.20%). Year-to-date, SPY has declined -2.56%, versus a % rise in the benchmark S&P 500 index during the same period.
About the Author: Jaimini Desai
Jaimini Desai has been a financial writer and reporter for nearly a decade. His goal is to help readers identify risks and opportunities in the markets. He is the Chief Growth Strategist for StockNews.com and the editor of the POWR Growth and POWR Stocks Under $10 newsletters. Learn more about Jaimini’s background, along with links to his most recent articles.
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