The 10 Highest Potential Returns in Auto Stocks

In a private speech to the Financial Planning Association, legendary Vanguard founder and former CEO John Bogle made an observation that's absolutely critical to understanding where the best stock returns come from -- and how to find the next great stock to buy.

He told the assembled guests that only three things drive investor returns:

  • Dividends
  • Earnings growth
  • Changes in valuation

That's all it comes down to. Historically, stocks have returned 9.6% per year on average -- 5%, 4.5%, and 0.1% from dividends, earnings growth, and valuation changes, respectively. Naturally, the best stocks to buy are the ones that will produce the highest combined return.

So which auto stocks will earn investors the best returns today? Obviously, no one can say with total certainty. You should always take future estimates with a grain of salt, particularly when analyst forecasts are involved. In fact, studies show that analysts' long-term earnings-per-share estimates tend to be off by some 40%, so I've reduced their estimates accordingly.

But by running the numbers, we can compile a list of which stocks are the implied best buys today. Here are our assumptions:

Company

Dividend Yield (current)

5-Year Growth Rate (reduced by 40%)

Price-to-Earnings Ratio (in 2016)

China Zenix (NYSE: ZX  ) 0% 14% 22
American Axle (NYSE: AXL  ) 0% 9% 18
General Motors (NYSE: GM  ) 0% 6% 14
Tenneco (NYSE: TEN  ) 0% 21% 29
Thor Industries (NYSE: THO  ) 3% 10% 18
TRW Automotive (NYSE: TRW  ) 0% 4% 13
Cooper Tire & Rubber (NYSE: CTB  ) 3.6% 4% 13
Johnson Controls (NYSE: JCI  ) 2.1% 11% 20
Ford Motor (NYSE: F  ) 0% 5% 13
Lear (NYSE: LEA  ) 1.1% 7% 16

Data from Capital IQ, a division of Standard & Poor's. Includes stocks on major U.S. exchanges capitalized over $200 million, with positive earnings and at least one analyst issuing long-term earnings estimates.

And here are their implied five-year annualized returns for shareholders. I've ordered the three return components by their reliability -- first dividends, then earnings growth, then valuation.

Company

Dividend Return*

Earnings Growth Return

Valuation Return

Implied Cumulative Annual Return

China Zenix 0% 14% 48% 61%
American Axle 0% 9% 36% 45%
General Motors 0% 6% 25% 31%
Tenneco 0% 21% 7% 28%
Thor Industries 3% 10% 13% 26%
TRW Automotive 0% 4% 19% 24%
Cooper Tire & Rubber 4% 4% 15% 23%
Johnson Controls 3% 11% 8% 22%
Ford Motor 0% 5% 17% 22%
Lear 1% 7% 12% 21%

Source: Author's calculations. *Assumes dividend growth at rate of earnings growth.

The raw numbers tell us that these are the 10 most promising names in automaking. Of course, analysts' growth assumptions for any individual company could prove overly optimistic or pessimistic, as could their future valuations, so the implied cumulative returns are hypothetical. That said, this list helps you focus on this sector's highest potential returners -- and provides an excellent starting point of names for further research.

So don't stop here. If any of these stocks interest you, add them to your personalized stock Watchlist. If you haven't started one yet, click here to begin.

Ilan Moscovitz doesn’t own shares of any company mentioned. You can follow him on Twitter @TMFDada. The Motley Fool owns shares of Ford Motor. Motley Fool newsletter services have recommended buying shares of Ford Motor and General Motors. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On September 06, 2011, at 4:17 PM, Mega wrote:

    Cumulative annual return doesn't make sense. Cumulative or annualized, pick one.

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