2 Reasons to Steer Clear of Auto Stocks in 2018

Dropping auto sales in the spring are bad news for AutoCanada Inc. (TSX:ACQ), and NAFTA progress could also spell trouble for Magna International Inc. (TSX:MG)(NYSE:MGA).

| More on:

Auto sales in Canada hit the two million mark for the first time in history in 2017. This represented the fourth straight year of record sales with the success of the light truck segment leading the way. However, a number of headwinds in the auto sector were identified by experts and analysts leading into 2018. Recent developments have vindicated some of these warnings.

Here are two reasons investors may want to stay on the sidelines in what may grow into an increasingly difficult year for the auto sector.

Auto sales dropped in March and April

Auto sales hit record levels in Canada in the months of January and February. After a rate hike in mid-January, this was especially encouraging, but recent data should temper expectations.

In March, vehicle sales fell 0.6% year over year. Passenger car sales dropped 12.4% year-over-year while sales in the light truck segment increased 5.2%. The numbers were still historically high, which may have served as a silver lining for onlookers.

April auto sales were released by DesRosiers Automotive Consultants on May 2. Passenger cars dropped by another 12.4% in April, while the number of light trucks rose 2.2%. David Adams, president of the Global Automakers of Canada, said that cooler weather in April may have contributed to a delay in the spring market.

AutoCanada Inc. (TSX:ACQ) stock was down 1.82% in afternoon trading on May 3. Shares of AutoCanada have dropped 5.5% in 2018 thus far. The Edmonton-based operator of franchised automobile dealerships reported record revenues in 2017. The company is expected to release its first-quarter results early this month. Earnings may reflect the relative strength of the industry in January and February.

NAFTA resolution could hurt the broader industry

The impact of broader policy also threatens the industry, both for dealers and auto parts manufacturers like Magna International Inc. (TSX:MG)(NYSE:MGA). Shares of Magna have climbed 8% in 2018 after the company posted record sales in 2017.

A recent study from the Center for Automotive Research suggested that new NAFTA auto content rules could dramatically increase pricing for North American vehicles.

Negotiators are reportedly working on a proposal that would stipulate a greater amount of North American auto content, and favour high-wage jurisdictions in the U.S. and Canada. The study in question estimates that at least 46 vehicle types fail to meet these criteria. The producers would be given the choice to obey the NAFTA rules or be subject to a 2.5% tax on a light vehicle in the U.S. and 6.1% in Canada.

The conclusions of the study were troubling. It projected that tariffs could add up to a $3.8 billion tax on U.S. consumers and add between $470 and $2,200 to the cost of said vehicles. This could hurt vehicle sales across the continent. Jeff Rubin, a senior fellow at Canada’s Centre for International Governance Innovation, predicts that the industry could face a long-term decline. He also predicted that companies like Magna would opt to pay the tax rather than undergo the changes necessary to meet new stipulations.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Ambrose O'Callaghan has no position in any of the stocks mentioned. Magna is a recommendation of Stock Advisor Canada.

More on Investing

Canadian dollars in a magnifying glass
Dividend Stocks

3 High-Yield Dividend Stocks That Are Screaming Buys Right Now

Are you looking for great income stocks? Here's a trio of high-yield dividend stocks that pay insane yields right now.

Read more »

A red umbrella stands higher than a crowd of black umbrellas.
Bank Stocks

Best Stock to Buy Right Now: TD Bank or Manulife Financial?

Manulife continues to see momentum in its business and stock price, while TD Bank stock remains down and out.

Read more »

cloud computing
Tech Stocks

3 No-Brainer Tech Stocks to Buy With $1,000 Right Now

These three Canadian tech stocks could be among the best growth opportunities in the market right now.

Read more »

Piggy bank with word TFSA for tax-free savings accounts.
Dividend Stocks

Transform a $5,000 TFSA Into a $50,000 Retirement Nest Egg

The TFSA is a powerful tool that can grow a small investment into a substantial retirement nest egg over time.

Read more »

Canadian Dollars bills
Metals and Mining Stocks

2 Cheap Canadian Stocks Under $20 to Buy This November

Cheap TSX stocks such as Endeavour Silver are trading at an attractive valuation in November 2024.

Read more »

happy woman throws cash
Tech Stocks

3 Growth Stocks That Could Be Long-Term Wealth Creators

These three growth stocks aim to grow their financials at a higher rate than the industry average, thus delivering superior…

Read more »

how to save money
Bank Stocks

This 5.9% Dividend Stock Pays Cash Every Month

First National Financial (TSX:FN) has a 5.9% yielding dividend that is paid out monthly.

Read more »

gift is bigger than the other
Investing

The Best Canadian Stocks to Buy With $5,000

These Canadian companies have solid growth prospects and the ability to deliver profitable growth even at a large scale.

Read more »