Have you been to an auto dealer lately? Their lots are full of customers. My salesman could not even find an open desk to put me at. We finally had to settle on one without the hot lights. I just hate the whole car buying experience.
Nevertheless, now is a great time to buy a car. The economy is on the mend, interest rates are still relatively dirt cheap, and the automakers continue to innovate. Lithia Motors (LAD), which is headquartered in Medford, Oregon is a good proxy as to just how strong auto sales have been recently.
Lithia operates 87 car dealerships in 11 western states offering 27 brands of used cars and light trucks.
Low interest rates have driven growth throughout the auto industry in companies like Ford (F) and General Motors (GM), and this has also trickled down to the auto parts producers. In fact, Delphi Automotive (DLPH) has been one of my top-ranked stocks for the last six month.
Data from Best Stocks Now App
You can see from the chart below as to how this large-cap auto component stock has fared over the last twelve months!
Unfortunately, the horse is pretty much out of the barn on the shares of Delphi. But, I have been watching another very similar stock beginning to follow in Delphi’s tire tracks.
Illinois based Tenneco (TEN) is an auto parts company that engineers and manufactures suspensions, exhaust systems, and is developing a new line of brake pads. Tenneco manufactures products for auto companies, locomotives, trucks, and all other vehicles. Tenneco also has many after-market production companies.
This is a mid-cap company ($2.85b) with an aggressive growth risk profile, which makes it a higher risk and higher reward investment.
Mid-cap, domestic stocks continues to be one of the sweets spots in the market. That is a good start. If I can also find superior performance, good value, and a healthy stock chart, I may be interested.
Let’s first take a look at the stock’s performance. I like to compare the stocks long-term, intermediate term, and short-term performance with that of the S&P 500:
As you can see from the snapshot above, the stock has outperformed the market by a wide margin over the last 1, 3, 5 and 10 years. Because of its performance compared to the S&P 500 and the other 3,400 stocks that I track, this stock gets a performance grade of “A-“.
Keep in mind that this stock was down a whopping 88% in 2008, however. For this reason, this is a high-risk type of stock.
This stock currently passes my very stringent performance test. Performance is great, but I don’t like to buy stocks on that factor alone. Value is also a very important piece of the puzzle. I don’t like to pay up for a stock. A combination of value and performance is essential to me. So let’s look at this stock’s current valuation:
Tenneco is currently trading at 10.15 times forward earnings. Tenneco is selling at a very steep discount to its expected growth rate of 19.7%. This gives Tenneco a PEG ratio of 0.52.
I next take next year’s earnings estimates of $4.46 and extrapolate them out over the next five years. Once I have done this, I apply a multiple that I feel is appropriate for the stock.
The five-year target price that I calculated from the company’s earnings estimate is $90. The stock has an upside potential over the next 5 years is over 98%. I require 80% or more. This stock meets my requirements in my valuation criteria and gives this stock an “A-“ value grade.
The last piece of the puzzle for me is the one-year stock chart. I don’t like sideways trends. I want the stock to make up its mind first. I never buy downtrends. I am also very wary of extended uptrends like the one that Delphi currently sports.
As you can see from the chart above, the stock has recently broke out of a two-month consolidation and is a little bit extended right now. But, the valuation is extremely compelling right now. The stock has begun a new uptrend that will hopefully remain intact for a good long while.
If it does not, as always I have my exit strategy. I would not want to see this stock break below its 50 day moving average.
The stock passes all of my key tests that include the stock chart, performance test, and valuation test.
Of the 3,399 stocks that I track and grade, Tenneco comes in at 37th and has been pretty steadily climbing the ranks in comparison to the other stocks. It earns an overall grade of “A”. Clients of Gunderson Capital Mgt. with an aggressive risk profile hold this stock.