Subprime Fallout Spreading to Autos?


A couple days ago we looked at Lexus — in short, it plans to target the “prestige luxury” segment where some car buyers have a fleet of cars and assets in excess of $5m — prompted by an article in the WSJ. Since then, reports out of the U.S. show further housing weakness, how subprime home mortgage troubles could be spreading to auto loans and we see that consumer confidence dropped to its lowest level since November. This does not bode well for automakers.

It is true that higher income individuals and thus higher-end autos are less impacted by subprime issues, but it is also true that market sentiment is influenced by signs of a weakening economy, and thus, auto stocks may struggle.

That said, we reiterate our selection of Daihatsu (JP: 7262), as having a favorable risk/reward profile and higher investment profit potential than rivals.

Daihatsu is a play on the mini-car segment in Japan and overseas. It is majority owned by Toyota (JP: 7203) (NYSE: TM), 51.1%.

A second choice is Nissan (JP: 7201) (Nasdaq: NSANY), when considering how it has struggled over the past year when Toyota and Honda (JP: 7267) (NYSE: HMC) were firing on all cylinders — meaning it has a cheaper valuation and higher dividend yield.

Toyota is a sound choice, especially over the long-term, but in the near-term, it could fall both on profit-taking and broad market weakness, given its large representation in index and mutual funds. A strategy here is to buy on dips and/or consider taking some profits, depending on your situation.

In either case, we suggest accumulation / building a position, as opposed to a lump sum investment, with a holding period of at least a year.