Greater than the sum of its (auto) parts
08/02/18

Go figure: While S&P 500 (SPX) auto industry stocks are down nearly 7% over the past month, the auto components group is up more than 5.5%, and more than 3% over just the past week.

Despite pretty good sales numbers in recent months, auto stocks have been battling a few factors—tariffs, mostly, but also high vehicle prices, rising interest rates (more expensive loans), and market saturation.1 General Motors (GM), in fact, released a statement in late June warning that proposed tariffs on automobiles, along with the existing tariffs on steel and aluminum, would make the company less competitive and lead to job cuts.2

Auto components manufacturers, perhaps because of their product diversification and ability to supply a wide range of companies making different types of vehicles—electric and hybrid, in addition to gas—have suffered less at the hands of tariffs, real or threatened.

Borg Warner (BORG) and Aptiv (APTV) are two big players in the auto components space that have recently pulled back to interesting levels—one on a short-term basis, the other a bit longer-term. Both companies are involved in various areas of traditional auto manufacturing, but are also pushing forward-looking business lines, such as technology to extend the battery life of electric vehicles.3

Borg-Warner (BWA), 5/27/16 – 8/1/18. Bounced off 50% retracement

Source: OptionsHouse


BORG, which makes a wide range of engine, transmission, and emissions parts, has recently bounced after testing its early July lows—which happened to occur in the neighborhood of a 50% retracement of its June 2016–January 2018 uptrend (chart above). Many traders look for signs of reversals at the 50% retracement level, and although Borg’s latest bounce doesn’t yet qualify as a new uptrend, a breakout above the high of the current congestion (around $46.40) would give bulls additional reason to believe the stock could hold its 50% retracement longer term.

APTIV, a Dublin-based manufacturer of electrical and safety tech components for cars, has been trading only since late 2011, but since then it’s rallied from below $20 to its June high above $103. After pulling back sharply later in June, the stock spent most of July forming a trading range, but it broke out of it on Tuesday (on positive earnings) before returning to that breakout level yesterday (chart below).

Aptiv (APTV), 12/12/17 – 8/1/18. Breakout and pullback.

Source: OptionsHouse


If the auto components industry can continue its relative outperformance, BORG and APTV may have a chance to build on their recent upside momentum.

And if the tariff situation improves, they stand to benefit even more from improvement in their parent industry.

Market Mover Update: The Nasdaq 100 (NDX) has, for now, kept its uptrend intact by making a higher low and close on Tuesday and yesterday, establishing Monday as a swing low that’s higher than the late-June swing low (see “It’s all relative—strength, that is”).

The NDX got a nice assist yesterday from Apple’s (AAPL) after-market earnings beat on Tuesday. The stock gained more than 5% yesterday, topping $201 and inching closer to making Apple the first US company with a $1 trillion market cap—a milestone the company would reach with a share price of $203.45.4

After a big jump on earnings last week, Total System Services (TSS) pulled back to its breakout level early this week (see “Letting the market come to you”). The company beat its headline earnings and revenue numbers, and subsequently received some raised price targets from firms following the stock.5

 

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1 Investor’s Business Daily. U.S. Auto Sales Strong, But This Is Why GM, Ford Stocks Keep Falling. 7/3/18.

2 The Washington Post. GM says new Trump auto tariffs threaten American jobs. 6/29/18.

3 Reuters. Auto suppliers retool to chase electric vehicle bonanza. 8/2/18.

4 CNBC.com. Apple is up 4% as it races to $1 trillion market cap. 8/2/18.

5 StreetInsider.com. Total System Services (TSS) PT Raised to $105 at RBC Capital. 7/25/18.