The car business is in trouble. But it could actually help one of my holdings in Top Stock Advisor. Let me explain...
On April 3, Autodata released March sales numbers and they revealed that vehicle sales fell to the lowest level in more than two years. Auto sales have risen every year since the financial crisis and hit a record 17.6 million vehicles last year. But since the turn of the New Year sales have begun to fade.
And the situation is likely only to get worse.
Think about it this way. If the price of a used car isn't that much different from a brand spanking new one... why not get a new vehicle? But as used car prices fall, then the disparity in price makes it easier for consumers to choose used.
But the real problem looming in the auto industry -- one hardly anyone is talking about and which could have a devastating effect on our economy -- is the uptick in defaults and delinquencies.
Thanks to record low interest rates, the lengthening of auto loan terms (you can now get a 97-month auto loan... that's eight years!) and the push onto "subprime" borrowers, usually defined as someone with a credit score of 620 or less, auto debt has skyrocketed. According to the Federal Reserve Bank of New York, that debt now totals a record $1.1 trillion.
What's worse is that in order to keep selling cars, lenders have loosened underwriting standards and are now giving auto loans to even less creditworthy individuals (those with credit scores below 550) and even to borrowers with no credit history at all. In other words, people who can't afford a car. There's a really annoying ad on the radio airwaves in Austin that has a little jingle that goes something like this: "In a pickle? Don't worry, we can get you into a new car only a nickel. No credit, bad credit, doesn't matter. With my nickel, pickle sale, you could be driving a new car for only a nickel."
Remember what happened when lenders gave subprime borrowers money to buy a home they couldn't afford? It didn't end well... and it's not going to end well in the auto industry either.
And like I said, delinquencies are on the rise. The value of auto loans that are at least 30 days in default currently totals $23 billion, up 14% in just the last year.
Now that used-car prices are beginning to fall it could kick the default cycle into high gear. Here's how this vicious cycle will play out: First, because of the easy credit policies and extended loan terms, many buyers have no equity in their cars. And with used-car prices falling, they will become even more "underwater" in their loans. So they'll do exactly what many folks who borrowed too much on their homes did... mail the keys back and look for a cheaper version.
While many companies -- either on the lending side or the vehicle-selling side -- will be negatively affected, not every company will be a victim of the collapse of the auto sector.
A Competitive Moat Against Online Retailers
In fact, it could actually be a boon for one of my holdings in my premium newsletter, Top Stock Advisor. You see, the average age of vehicles in the United States has reached an all-time high of nearly 12 years. These cars will need parts to keep them on the road. And the flood of used cars coming off leases over the next few years will keep auto-parts retailers busy.
Unfortunately, the share price of the auto parts retailer we own has drifted lower ever since adding the company to the Top Stock Advisor portfolio in August 2016. One of the main culprits came at the hands of online-retail behemoth Amazon (Nasdaq: AMZN) as it has expanded its auto-parts business.
Amazon has gained traction in the auto-parts industry by doing what it has always done... undercut prices. Even though Amazon might suffer a loss in the short term, it gets its foot in the door with low prices, but then it slowly raises its prices to what you can find everywhere else, as consumers just figure Amazon is the cheapest.
Now don't get me wrong, Amazon is a formidable competitor, but when it comes to car parts it will be hard for Amazon to duplicate the expertise and service level found at your local auto parts store -- and that goes double for my portfolio holding. Credit-rating agency Moody's agrees with me. It doesn't expect Amazon to make a significant dent in brick-and-mortar auto-parts retailers' sales. That's because cost-conscious consumers will turn to independent garages for repairs.
Moody's believes the relationship between independent garages and auto-part retailers provides a competitive moat against online retailers like Amazon. Unlike Amazon, my auto parts retailer holding can provide nationwide, same-day delivery. These garages, which are the "commercial" segment of its business, are a big opportunity for growth. In its larger, "do-it-yourself" retail segment, customers get the benefit of a real person with automotive expertise making sure they walk away with the right part. Amazon can't duplicate that level of service.
I Wouldn't Bet Against These Stocks
All of this to say, I believe it's just a matter of time before my holding takes off. And while I can't share the name of my pick with you today (that's reserved for Top Stock Advisor subscribers only), there are a number of potentially lucrative investment candidates in this space.
The point is, the auto parts business isn't going anywhere. In fact, the entire industry has done incredibly well over the last decade or so.
And with new car sales slowing down -- not to mention the average car on the road significantly older than we've ever seen before -- it's hard to bet against any of the names in this space.
That said, if you'd like to get the name of my favorite pick -- as well as more of my favorite picks for 2017 -- check out this link.