After hitting record levels during the first half of the year, U.S. auto sales increased at a relatively slower pace in July. Boosted by a variety of factors, such as cheap gasoline, auto sales had enjoyed appreciable growth before last month. However, as pent-up demand seemed to be petering out, it seemed that demand for automobiles was plateauing.

However, fresh data from research and consulting firm TechnoMetrica Market Intelligence shows us that demand for the sector is likely to pick up sharply over the rest of the year. Adding auto stocks to your portfolio seems to be a smart choice at this point in time.  

Sales Hit Record in 1H16, Pace Slips in July

During the first half of 2016, light vehicle sales increased 1.5% year over year to 8.65 million units, per Autodata. This set a new record for first-half sales results. Sales increased 2.5% year over year to 1.5 million units in Jun 2016. Product segments like trucks and utility vehicles recorded higher sales in June.

Gains for July were relatively muted in comparison. U.S. light-vehicle sales inched up 0.5% year over year to 1.52 million units in Jul 2016. However, the figure came in below most estimates. Market watchers took the view that pent-up demand powering the sector since 2009 was slowly decreasing. 

Sales Likely to Increase in 2H16

Data released by TechnoMetrica shows that demand for automobiles is likely to witness an uptick over the rest of the year. The firm’s indigenous Auto Demand Index or ADI is a method of gauging the willingness of consumers to purchase or lease a new vehicle over the next six months. The ADI survey is conducted every month and the index experienced a substantial decline in July.

Most of this was attributable to global concerns such as the fallout of the surprise Brexit verdict. However, the index has surged by 41 points or 50% during August, to touch a score of 123, the highest reading in a year. The ADI has also exceeded its short and long term average levels during August.

Job Gains, Cheap Gasoline to Drive Sales

Going forward, a resurgent job market and cheap gasoline are likely to fuel higher automobile demand. The economy added 255,000 jobs in July, following an upwardly revised reading of 292,000 job additions for the month of June. Wages rose by 0.3% while increasing 2.6% on a yearly basis. The labor participation rate increased by 0.1% to 62.8% while the employment to population ratio moved up from the level of 59.6% recorded in June to 59.7%.

Additionally, gasoline prices continued to fall in July. Data from the American Automobile Association (AAA) shows that the average national price of gasoline declined from $2.25 per gallon to $2.12 per gallon over the last month. A recovery in oil prices looks unlikely over the short term as supplies continue to mount and an agreement on an output cap looks elusive.  

Our Choices

TechnoMetrica’s survey indicates that demand for automobiles is likely to experience a substantial increase over the rest of the year. Jobs growth and inexpensive fuel are likely to propel higher auto sales in the days ahead.

This is why picking auto stocks would make for a prudent option at this point. At the same time, it is important to pick winning stocks.  

This is where our VGM score comes in. Here V stands for Value, G for Growth and M for Momentum and the score is a weighted combination of these three scores. Such a score allows you to eliminate the negative aspects of stocks and select winners. However, it is important to keep in mind that each Style Score will carry a different weight while arriving at a VGM score. 

We have narrowed down our search to the following stocks based on a good Zacks Rank and VGM score.

Horizon Global Corporation (HZN - Snapshot Report) is a designer, manufacturer and distributor of towing, trailering, cargo management and accessory products for original equipment, aftermarket and retail customers.

Horizon Global has a Zacks Rank #1 (Strong Buy) and a VGM Score of A. The company has expected earnings growth of 21.5% for the current year. Its earnings estimate for the current year has improved by 16.3% over the last 30 days.

Superior Industries International, Inc. (SUP - Analyst Report) designs and manufactures cast aluminum road wheels primarily for the domestic original equipment manufacturer (OEMs) market.

Superior Industries has a Zacks Rank #1 and a VGM Score of A. The company has expected earnings growth of more than 100% for the current year. Its earnings estimate for the current year has improved by 12% over the last 30 days.

Standard Motor Products Inc. (SMP - Analyst Report) manufactures and distributes replacement parts for motor vehicles.

Standard Motor Products has a Zacks Rank #1 and a VGM Score of A. The company has expected earnings growth of 33.8% for the current year. Its earnings estimate for the current year has improved by 7.1% over the last 30 days.

Cooper-Standard Holdings Inc. (CPS - Snapshot Report) operates as a supplier of systems and components for the automotive industry.

Cooper-Standard has a Zacks Rank #1 and a VGM Score of A. The company has expected earnings growth of 10.6% for the current year. Its earnings estimate for the current year has improved by 9.3% over the last 30 days.

The Goodyear Tire & Rubber Company (GT - Analyst Report) is one of the world’s largest tire manufacturing companies, selling under Goodyear, Dunlop and various other “house” brands as well as private-label brands.

Goodyear has a Zacks Rank #2 (Buy) and a VGM Score of A. The company has expected earnings growth of 18.1% for the current year. Its earnings estimate for the current year has improved by 1.6% over the last 30 days.