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What are we looking for?

In both Canada and the United States, car sales are climbing back from their post-crisis plunge. With that in mind, it's a timely moment to look at stocks in the auto sector to see what values may be on offer.

How we did it

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To keep things simple, we limited our search to auto-related stocks on either the Toronto or New York exchanges.

Job No. 1 was to find firms that have analysts at least a little bit excited. Analysts aren't perfect (yes, that's an understatement) but they do offer an informed perspective on issues that may not be susceptible to spreadsheet analysis. So our screen began by looking for auto and auto-parts firms that have a consensus analysts' rating above three on a scale that goes from one (strong sell) to five (strong buy).

Next up, our screen looked for firms that meet a couple of basic value criteria. Their enterprise values (the total of their stock market capitalizations plus net debt) had to be no more than eight times their earnings before interest, depreciation and amortization (EBITDA). In addition, their share prices to forward earnings (forward P/E) had be under 12.

What we found

The usual suspects – Ford Motor Co., General Motors Co. and Magna International Inc., to name three – plus a number of firms that may have escaped your attention.

China Zenix Auto International Ltd., for instance, is a wheel-maker that caters to the Chinese market; analysts appear to love its prospects. Lear Corp., which makes seating and electrical parts, also earns plaudits from the Street, as does Tenneco Inc., which makes Monroe shock absorbers and other "ride performance" products.

One risk factor you should consider is debt. If the economy were to hit a rough patch, the firms best positioned to ride out the problems would generally be those with lower levels of indebtedness. Some of these firms are far more in hock than others. Before investing in any of the names on this list, do your own research.

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Keep in mind that the auto sector's immediate future depends on whether car sales will continue their strong performance. That, in turn, is likely to depend on economic growth. So one way to view all these firms is as a bet on a strong recovery. Drive accordingly.

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About the Author

Ian McGugan is a reporter with The Globe and Mail's Report on Business and has been writing about investing, economics and business for more than 20 years. He joined the Globe and Mail in 2010. He has been executive editor of Canadian Business magazine and founding editor of MoneySense magazine. More


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