Ride the markets with Automobile Stocks

Every Bull Market has at least one star performing sector which delivers the maximum returns and is the theme for which the rally is remembered. Starting from the cement stocks which outperformed the Harshad Mehta led rally in 1992 to the famous software bubble of 2000 and the more recent infrastructure and real estate led bull market, it has always been a single or bunch of sectors that have outperformed the markets in a major way. Investors getting into these sectors early have always benefited the most and made fabulous returns. Market participants who spotted the outperforming sectors early in the last bull market and bought stocks like L&T, Unitech, and JP Associates in 2004 multiplied their capital by 2007.

As this bull market gets stronger and better entrenched the important question which needs to be ascertained is which are going to be the darling sectors of this up move which with some minor bearish pull backs and corrections is likely to last for a number of years. We believe that automobile could be at least one of the sectors which investors should buy on all declines and look forward to becoming wealthier as this bull market progresses. Our reasons for the bullishness on this sector are based on the following observations:

1.)    Under ownership and under performance before this bull market started – All sectors which surprise us on the upside are generally not fancied in the previous bull market. They have either not been noticed or have been under performing the benchmark indices. Nobody discussed software stocks in the 1990s till they suddenly started performing in 1998-99. Automobile stocks have been underperforming the markets from 2006-2008. They have been shunned by investors till very recently when their out performance became very visible.

2.)    Trading near to or at an all time high – While the broader markets are still around 20% away from their all time highs most of the automobile stocks are quoting very near their all time highs. In fact on nearly every up move one or more stocks form a new 52 week high. Today M&M and Tata Motors have formed new highs. The chart given below highlights this point very well and is a clear pointer of things to come. Usually stocks forming new 52 week highs early continue to outperform as the bull market progresses.    

Stock	Closing Price on 1st Dec, 2009	52 Week High
Maruti Suzuki	1587.20	1737.20
Tata Motors	703.00	707.70
M&M	1080.15	1094.00
Ashok Leyland	53.00	54.95
Hero Honda	1730.60	1808.70
Bajaj Auto	1637.90	1665.00
TVS Motor	57.80	66.00

   3) Stellar performance by nearly all major companies – Every month the automobile numbers continue to defy gravity. Consider this month’s numbers mentioned below

Ø      Maruti sales up 84 percent year on year

Ø      Maruti's sales in the compact car (A2) segment comprising Alto, Wagon-R, Zen, Swift, Ritz and A-Star grew 60 percent over November 2008

Ø      Hero Honda posts best ever Nov monthly sales reported 31.49% growth in its November sales at 3.8 lakh units as against 2.89 lakh units in the same period last year and 7.34% jump as against 3.54 lakh units month-on-month.

Ø      Tata Motors and M&M also continue to dazzle with their performance

4) While the world economy continues to totter, India’s GDP growth has been very impressive indeed. Hence it is best to focus on sectors which depend on domestic consumption as that is likely to sustain and flourish in the coming years. In this respect also automobile sector scores well as it is dependent on domestic disposable income, which we are confident, will continue to burgeon.

Therefore we advise investors to increase the weightage of automobile stocks in their portfolios.