Auto Ancillaries Stocks

Different Types of Automotive Stocks

The automobile industry of India is huge. When it comes to automotive stocks, there are the following types of stocks available in the market:

• Automakers - These are the automobile manufacturers that manufacture vehicles like cars, trucks, buses, SUVs, and even Electric Vehicles (EVs). 
• Suppliers - These include companies that supply auto parts like seats, tires, and batteries, to advanced electronic systems. 
• Auto parts retailers 
• Auto dealers 

How to Evaluate an Auto Stocks? 

Auto stocks come in the consumer durables segment. This sector covers businesses and companies that manufacture products that should last for many years, such as cars, trucks, refrigerators, washing machines, etc. 

Before investing in auto shares, it is crucial to learn how different stages of the economic cycle affect the automobile companies and how these firms work to maximize their returns and keep growing during evaluating automobile stocks. These are as follows:

Learn About the Auto Sales Cycle 

Automobile and other related stocks in the automotive sector are cyclical stocks. This means, their profits depend on the confidence of customers. The reason behind this is simple when customers are worried about the downtrends in the economy, they postpone purchasing new vehicles. 

The cyclicality of automotive stocks matters to investors for the following reasons:

• Automakers generally have higher fixed expenses that cover areas like tooling, factories, labor, logistics networks, etc. These costs need to be settled no matter how many vehicles are sold. 
• Automakers and other retailers and suppliers of automobiles need to invest in product development in order to ensure that they have a steady flow of new products to stay competitive in the market. 
• High cost and low spending nature of automobile companies reflect that their profit margins can be low at times. When the market goes down and the economy hits a recession, the profits of these companies fall sharply, exposing future competitiveness and new product spending to risk.  

The best way to avoid the cyclicality of the automotive sector is to invest in automotive stocks that are familiar to the replacement market such as auto part manufacturers and retailers that primarily supply to the replacement market. 

Look at Their Cash Reserves 

During the 2008-09 recession period, the majority of automotive companies significantly cut their future product spending. And a few others that didn't, had brand new products in their showrooms when the recovery phase started and thus, were able to dominate the market. Ford and Hyundai are the two companies that did so. This set an important example for the automobile industry. 

Today, most automakers maintain a good cash reserve so that they keep investing in fresh product development even during periods of recession. Recently, an interesting thing happened during the COVID-induced recession. This time many automakers decided to cut down their investment in traditional combustion-style engines in support of EVs. 

Moreover, some automakers also use their cash reserves to pay dividends to their investors during a recession. 

Look At Their Competition

Here is a simple rule, the automakers that have the newest products will quote the highest prices and earn the fattest profits. Thus, automakers should keep on investing in product development to have a steady flow of fresh products down their pipelines. 

Besides, a big majority of automakers and auto part suppliers are also investing freely in advanced technologies like EVs, autonomous driving systems, advanced safety features, and so on. According to experts, investing in these futuristic technologies is very important for automakers if they want to remain competitive in the market. 

Influence Of Electric Vehicles (EVs) 

Some very interesting opportunities in the upcoming years will include manufacturers of electric vehicles. These advanced vehicles are trending in the world and if experts are to be believed, the EVs and Hybrid EVs will greatly replace the traditional internal-combustion engine vehicles. 

Electric vehicle manufacturers are expected to see high profit and growth in the near future, and this is an exciting opportunity for investors. However, one should keep in mind that the process of manufacturing and developing EVs is not completely different from the traditional vehicles. This means these manufacturers will also experience high costs just like traditional automobile companies. Besides, the competition in this segment is also going to be fierce because most traditional automakers are planning to introduce their own EVs. 

Important things to remember

1. Do Not Blindly Follow Hot Tips
   No matter how credible the source is, never follow a stock marketing tip blindly without conducting thorough research personally. Always select the stocks after doing proper research and analysis on the performance as well as the companies. While some tips can work out to give you huge benefits, the wrong ones can push you down under the risk pretty quickly. 
2. Eliminate Loser Stocks from Portfolio 
   There is absolutely no guarantee that a stock will rise after a great fall. Know that it is extremely important to be practical about what is possible and what's impossible in the stock market. So, upon realizing that a stock is performing poorly in your portfolio, accept your mistake and sell it immediately to prevent further losses. 
3. Don't Exceed Your Investment Budget Abruptly 
   While it's true that long-term investments are way better than other forms of investment, you shouldn't exceed your investment budget in a haste. Instead, decide on a fixed amount and invest it across various good stocks. Rather than investing in only one stock, divide your budget evenly across multiple good-performing stocks and shares.

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