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Don't Buy American ... or Japanese, Either

By Rich Duprey - Updated Nov 11, 2016 at 3:45PM

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Stocks of all carmakers look as though they're headed for the junk heap.

We know that U.S. carmakers have been a bucket of rusted bolts for some time, and many observers doubt that the emergency loans extended to General Motors (NYSE:GM) and Chrysler will change things. Yet many might be surprised that it's not just American car manufacturers having trouble moving cars off the lot. In fact, the entire automotive industry looks like a seizing engine.

Toyota (NYSE:TM) reported today that although it expects to just scrape together a net profit in its current fiscal year, which will end in March, it's going to report its first-ever operating loss. Just six weeks ago the Japanese carmaker had said it would be earning a 600 billion yen profit this year, making the newest forecasts a massive change of heart.

This news follows the move from Honda (NYSE:HMC) last week to slash its operating profit forecast by 67%.

If not even the maker of the Prius can earn a profit these days, what hope is there for those like Chrysler, which won't be getting around to marketing a stable of eco-friendly cars until 2010? The Prius accounted for more than half of all hybrid car sales in October, a month that saw such sales drop 10% from the year before. The next nearest car was the Camry at just below 13% of hybrid sales, with the Ford (NYSE:F) Escape coming in third at just 8% of sales.

Although this sales lull may give dealers the opportunity to replenish inventory in anticipation of increased demand next year, there's nothing to say buyers will be able to obtain credit anyway. The Federal Reserve's previous attempts to open up consumer lending opportunities have thus far been a failure. Having to unveil yet another new $200 billion program to juice consumer credit suggests as much.

But there doesn't seem to be much demand anyway to buy a car, hybrid or otherwise, and that's forcing automakers to slash production. With sales down 32% in November, Honda is trying to cut 119,000 vehicles from 2008 production plans, Toyota is engaging in a two-day work stoppage, starting today, to knock 9,000 cars out of its inventory, and Nissan (NASDAQ:NSANY) is cutting 78,000 more cars in January, to bring total production cuts to 225,000 vehicles for the current fiscal year.

Your money is driving in the slow lane if it's invested in car manufacturers these days. Most automaker share prices -- domestic or foreign -- are down 40% or more this year, and the prospects seem dim for gains. We might suspect that GM might not be a good deal these days, but at 18 times next year's estimated earnings, Toyota still doesn't seem like much of a bargain either; neither does Honda at 16 times.

On one side of the ocean is an auto industry doomed from decades of poor management decisions, and on the other is one that's reeling from the effects of government policy gone awry. Neither makes a compelling investing case for driving ahead.

Nissan is a Motley Fool Global Gains pick. Try any of our Foolish newsletter services free for 30 days.

Fool contributor Rich Duprey has no financial position in any of the stocks mentioned in this article. You can see his holdings. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Ford Motor Company Stock Quote
Ford Motor Company
$12.01 (3.89%) $0.45
Honda Motor Co., Ltd. Stock Quote
Honda Motor Co., Ltd.
$25.04 (0.80%) $0.20
Toyota Motor Corporation Stock Quote
Toyota Motor Corporation
$159.08 (0.99%) $1.56
General Motors Company Stock Quote
General Motors Company
$34.82 (5.55%) $1.83

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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