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The Biggest Risk for Automakers

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What's the biggest risk for auto stocks? Taking a 50,000-foot view, it's the fact that it's incredibly difficult for any automaker to develop a quality and sustainable moat -- mainly because these companies compete in a product-driven business. Making quality and reliable vehicles is priority No. 1 for all automakers, and it's not easy for these companies to innovate and distinguish themselves continuously. 

That's not to say there aren't any good values in this space. In the following video, analyst Brendan Byrnes explains his two favorite auto stocks and gives guidance on how investors should treat investing in automakers.

Ford has been performing incredibly well as a company over the past few years -- it's making good vehicles, is consistently profitable, recently reinstated its dividend, and has done a remarkable job paying down its debt. But Ford's stock looks cheap despite the recent run-up. Does this create an incredible buying opportunity, or are there hidden risks with the stock that investors need to know about? To answer that, one of our top equity analysts has compiled a premium research report with in-depth analysis on whether Ford is a buy right now, and why. Simply click here to get instant access to this premium report.

Andrew: Hi, Fools. Andrew Tonner here. I'm joined today by our analyst Brendan Byrnes. Brendan, let's take a look at the automakers. It's an industry that's very cyclical. It's been in the news constantly over the last five years. Now, looking at it going forward, you think you've identified one of the biggest threats threatening these stocks. What is it?

Brendan: One of the things that automaker investors really need to keep an eye on is the fact that, really, no automakers have a moat around them, and it's an incredibly competitive area.

No real competitive advantages for the long term, and the reason for that is this is a product-driven business. The most important thing for everyauto maker is making quality, reliable vehicles, and if you slip up on that even just a little bit, you could lose a customer that could never return.

Even look at Toyota -- you could say maybe the closest toward actually developing maybe at least a narrow moat around them, back in 2008-09, when they were just absolutely killing it. What happens? Well, they had this gas pedal issue, a ton of recalls. People got hurt because of it.

When you look at the automaker space overall, that's something you definitely need to be aware of. That's why, despite the fact that I own Ford and GM, you constantly have to keep an eye on not just the stocks but the companies, and make sure that they're producing quality, reliable vehicles.

GM's getting better about this. Their product development was essentially shut down when they went through bankruptcy, so they're a little bit behind Ford.

Ford, we know, is doing great. Their Fusion is getting great reviews, also their Escape. I like Ford a little bit better. I think it's about a year or two ahead of GM, at least from a product development standpoint and the turnaround with their One Ford plan, as far as saving costs, getting to a common platform.

That's one of the things that investors really need to keep an eye on. You can't just get these stocks in your portfolio and not look at them for another 10 years. You constantly have to keep an eye that they continue to innovate.

We talked about earlier, GM's deal with AT&T bringing 4G into cars -- stuff like that that I love to see from GM, which traditionally has not been the most forward-looking automaker, definitely getting back on track. I like that.

Europe continues to hurt these automakers, but Ford's plan in Europe, I think, is a good one. They're cyclical, we know. That's why they're getting crushed so badly in Europe, but beyond cyclicality, I think not having any real competitive advantages overall and no moat for individual automakers is the biggest thing that investors have to watch.

It doesn't mean they're not a buy. I still think they're cheap, but again I own the two big domestic automakers, so I think there is opportunity there. Investors just have to watch the space very carefully.

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