7 Bold Predictions for Auto Stocks in 2020

John Divine

The 7 best auto stocks to watch in 2020.

Automotive stocks are famously cyclical, tending to advance or decline with the wider economy as consumers ramp up or rein in large purchases in accordance with their financial situation. The auto industry has slowed in recent years despite the relatively rosy global economy, and Wall Street has -- generally speaking -- been relatively pessimistic on the space for a couple of years now, valuing auto-centric businesses at conservative multiples in anticipation of a worsening economy. But are these valuations deserved? The following names are among the best auto stocks in 2020, as trends like electric vehicles, autonomous driving and demand from China increasingly come into focus.

Honda Motor Co. (ticker: HMC)

Seemingly undervalued by all major metrics, Honda simply doesn't get the love it deserves from Wall Street. The Japanese industrial giant, founded in 1946, trades at just 10 times earnings, 8.8 times forward earnings and a ridiculous 0.64 times book value. That alone should make HMC one of the best auto stocks of 2020. For the unconvinced, the company has raised its dividend in eight of the last nine years and management expects to buy back around 100 billion yen worth of stock in fiscal 2020, which works out to just shy of $1 billion. Honda's underlying business is somewhat stagnant, but at these levels, and while paying a 3.7% dividend, HMC can't be overlooked.

Douglas Dynamics (PLOW)

While not an out-and-out automotive stock per se, the $1 billion Milwaukee-based Douglas Dynamics is, as its ticker symbol indicates, a snowplow company -- at least in part. Douglas Dynamics sells truck attachments like plows, salt-spreading equipment, and other snow and ice management equipment. Its work truck solutions segment is a go-to for plumbers, cable companies, landscapers, towing companies and construction firms -- for practically any commercial reason you'd want to augment your vehicle, Douglas Dynamics can do the job. PLOW must do a good job because revenue has gone from $300 million in 2014 to an expected $561 million in fiscal 2019. Shares pay a 2% dividend.

Toyota Motors Corp. (TM)

If you're researching the best auto stocks of 2020 it's impossible not to run into Toyota. Toyota is simply the single most valuable auto company on earth. That said, TM stock may actually be undervalued, with shares trading for less than 10 times free cash flow and a price-earnings-growth ratio of 0.8. Yes, many other large carmakers are seeing slightly lower sales and experiencing softness in the market, but TM saw revenue rise by 4.2% in the latest six-month period. To its credit, and despite its size, Toyota is serious about innovating. Toyota aims to become a mobility company and is investing heavily in connectivity, electric cars and AI-powered self-driving capabilities. TM pays a 2.6% dividend.

Volkswagen AG (VWAGY)

Volkswagen is the second-most valuable car company in the world, so it's no surprise it's earned a spot as one of the best auto stocks of 2020. In China, now the largest auto market on earth, vehicle deliveries rose 1.7% in 2019 despite an actual decline in the broader market. Overall deliveries rose by 1.3%, and the company managed to grow its market share in every region globally. Far from a one-trick pony, Volkswagen's portfolio of brands includes Audi, Porsche, Lamborghini, Bugatti, Ducati and Bentley. As the broader market weakens, a strategy of focusing on its pricier, higher-end brands worked last year, with Porsche deliveries up 10% and Lamborghini sales surging 43%.

Tesla (TSLA)

No list of the best automotive stocks of 2020 is complete without the industry's sweetheart, the sexy underdog everyone loves to love: Tesla. No auto company on earth has the combination of size and growth that TSLA does. In the three months between October 2019 and January 2020 shares doubled, as record quarterly delivery numbers and the opening of a Tesla Gigafactory in China sent its market cap to almost $100 billion. Tesla's first-mover advantage in autonomous electric cars is still paying off, and analysts expect roughly 25% revenue growth in 2020. Competitors to the Model S, like the Porsche Taycan, are coming out in 2020, but the Taycan still falls short on zero to 60 time (3.8 vs. 3.7 seconds), range (253 vs. 373 miles) and price ($103,800 vs. $79,900).

Tata Motors Ltd. (TTM)

Among the top automotive stocks for the 2020s is Tata Motors, the India-based multinational, adding some geographic diversity to the list. The $10 billion Tata's crown jewel is Jaguar Land Rover (JLR), a segment with two world-renowned brands. This prized possession provides much-needed stability and pricing power, especially given Tata Motor's weakening stand-alone India business. JLR shined in Tata's last reporting period though, with sales of the Range Rover Evoque up 54% and JLR unit sales in China up 24%. A cost-cutting and profitability plan called Project Charge aims to deliver a £1 billion improvement in costs and profits in fiscal 2020. Analysts are expecting robust earnings growth from TTM in the years ahead as these efforts progress.

Penske Automotive Group (PAG)

Automotive and commercial truck dealer Penske Automotive rounds out the list of the best auto stocks for 2020. As the wider industry scrapes by, PAG is diligently growing sales, buying back stock and boosting its dividend. Although revenue growth isn't expected to keep this pace up throughout 2020, sales rose 5.5% last quarter and would've risen 7.7% if it weren't for unfavorable foreign exchange movements. The company currently uses just 30% of earnings to pay a 3.3% dividend, and PAG has raised its payout annually for the last eight years. Trading at just 9 times earnings, this $4 billion auto dealer with steady results shouldn't be written off.

Best automotive stocks of 2020

-- Honda Motor Co. (HMC)

-- Douglas Dynamics (PLOW)

-- Toyota Motors Corp. (TM)

-- Volkswagen AG (VWAGY)

-- Tesla (TSLA)

-- Tata Motors Ltd. (TTM)

-- Penske Automotive Group (PAG)

See all auto stocks.