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The average automobile industry company rose more than three-fold nadir-to-peak from the throes of the 2008-09 market collapse to its peak earlier this year. Auto industry stocks have corrected by almost a third this year, as fears of a double-dip cast an ugly backdrop on the outlook for the global economy going forward. However, the long-term outlook for the sector is favorable given the projected increases in auto ownership in China, India, Brazil and the rest of developing world.

In this article, via an analysis (based on the latest available institutional 13-F filings), we identify the automobile industry companies that are being accumulated and those being distributed by these legendary or guru fund managers, such as Warren Buffett, George Soros, Carl Icahn, Steven Cohen and Mario Gabelli, based on our extensive database of the buying and selling activities of over 60+ such managers. We then crossed that data with the auto industry companies that are trading at value prices, based on their projected earnings for FY 2012 and the operating cash flow on a trailing-twelve-month (TTM) basis, and came up with a list of undervalued companies in the sector that are being accumulated by these guru fund managers, and those being distributed by them.

The automobile industry is defined here to include not just the manufacturers of automobiles, but also parts suppliers and service providers, as well as automobile retailers and rental companies. Furthermore, the hedge fund and mutual fund managers included in this select group include only high profile names who by virtue of their long-term market-beating returns have earned their standing in the investment community and are worthy of our attention. They include well-known names such as those mentioned above, as well as perhaps relatively lesser-known names that also have a stellar long-term history of beating the markets, such as Seth Klarman, John Griffin, Prem Watsa, Robert Karr and Lee Ainslie.

Based on our research, we identified that guru funds are slightly bearish on the auto industry, cutting a net $155 million from their prior $29.25 billion position in the group, selling $4.01 billion and buying $3.86 billion worth of stocks in the group. Furthermore, overall they are under-weight in the group by a factor of 0.6; taken together, guru funds have invested 6.7% of their capital in the auto industry companies compared to the 11.6% weighting of the sector in the overall market.

The following are the auto sector companies in which guru funds accumulated the most in the recently reported June quarter, and that are also trading at a discount to their peers in the group based on forward P/E and price-to-operating-cash-flow (P/CF) on a TTM basis:

Exide Technologies (XIDE): XIDE manufactures and supplies lead acid batteries for transportation and industrial applications. Guru funds added a net $4 million to their $1 million prior quarter position, and taken together guru funds hold 2.0% of the outstanding shares, greater than their 1.6% weighting in the group. The top buyer was SAC Capital Advisors ($4 million). Overall, 160 institutions hold 89.9% of XIDE shares, with Tontine Associates ($27 million), Fidelity Investments ($27 million) and WS Capital Management ($17 million) being the largest holders with 12.2%, 11.8% and 7.7% of the outstanding shares respectively.

XIDE trades at a forward 2.4 P/E that is less than the forward 7 P/E for the auto industry, and it trades at a 3.6 P/CF ratio that is also lower than the average 6.3 P/CF ratio for the auto industry.

Ford Motor (F): Ford manufactures automobiles under the Ford and Lincoln nameplates, offers a wide range of after-sales vehicle services and products, and also offers vehicle financing, leasing and insurance services. Guru funds added a net $209 million to their $226 million prior quarter position, and taken together guru funds hold 1.0% of the outstanding shares, significantly less than their 1.6% weighting in the group. The top buyers were Capital Growth Management ($187 million) and York Capital Management Global Advisors ($77 million), and the top holders were Capital Growth Management ($187 million), York Capital Management Global Advisors ($94 million) and Legg Mason Capital Management ($91 million). Overall, 927 institutions hold 56.3% of F shares, with Evercore Trust Company ($2.95 billion) and Vanguard Group ($1.57 billion) being the largest holders with 7.2% and 3.8% of the outstanding shares respectively.

F trades at a forward 7 P/E that is at par with the forward 7 P/E for the auto industry, and it trades at a 3.7 P/CF ratio that is lower than the average 6.3 P/CF ratio for the auto industry.

General Motors Company (GM): GM is a global automaker that produces cars and trucks and sells them under the brand names Chevrolet, Cadillac, GMC, Buick and other brands worldwide. Guru funds added a net $152 million to their $349 million prior quarter position, and taken together, guru funds hold 1.3% of the outstanding shares-- less than their 1.6% weighting in the group. The top buyers were Perry Corp. ($61 million) and Glenview Capital Management ($48 million), and the top holders were Perry Corp. ($145 million) and Greenlight Capital ($88 million). Overall, 546 institutions hold 35.2% of GM shares, with Capital Research Global Investors ($1.36 billion) being the largest holder with 3.9% of the outstanding shares.

GM trades at a forward 5 P/E that is less than the forward 7 P/E for the auto industry, and it trades at a 6.0 P/CF ratio that is also lower than the 6.3 P/CF ratio for the industry.

Besides XIDE, F and GM, guru funds are also bullish about the following auto companies (see Table):

Dana Holding Corp. (DAN): DAN is a manufacturer of modules, axles, chassis, suspension and drive-shafts for automotive OEMs. Guru funds added a net $53 million to their $149 million prior quarter position, and taken together guru funds hold 9.7% of the outstanding shares, significantly greater than their 1.6% weighting in the group. The top buyer was York Capital Management Global Advisors ($53 million), and the top holders were York Capital Management Global Advisors ($57 million), Donald Smith & Co. ($41 million), Glenhill Advisors ($31 million) and GAMCO Investors ($29 million). Overall, 250 institutions hold DAN shares, with hedge fund Owl Creek ($105 million), Bank of New York Mellon Corp. ($94 million) and Vanguard Group ($92 million) being the largest holders with 5.4%, 4.8% and 4.7% of the outstanding shares respectively.

DAN trades at a forward 7 P/E that is at par with the forward 7 P/E for the auto industry, and it trades at a 7.7 P/CF ratio that is higher than the average 6.3 P/CF ratio for the industry.

Cummins Inc. (CMI): CMI manufactures diesel and natural gas engines, electric power generation systems and engine-related component products for OEMs worldwide. Guru funds added a net $36 million to their $293 million prior quarter position, and taken together guru funds hold 1.7% of the outstanding shares, approximately at par with their 1.6% weighting in the group. The top buyers and top holders in CMI were both Capital Growth Management ($163 million) and York Capital Management Global Advisors ($64 million), which added these new positions in the company in the June quarter. Overall, 722 institutions hold 87.6% of CMI shares, with State Street Corp. ($1.29 billion) and Fidelity Investments ($916 million) being the largest holders with 7.0% and 4.9% of the outstanding shares respectively.

CMI trades at a forward 9.8 P/E that is higher than the forward 7 P/E for the auto industry, and it trades at a 10.6 P/CF ratio that is also higher than the average 6.3 P/CF ratio for the auto industry.

The following are auto industry stocks that guru fund managers are most bearish about (see Table):

Johnson Control Inc. (JCI): JCI manufactures automotive interior systems and batteries for OEMs and control systems for non-residential buildings. Guru funds cut a net $103 million from their $432 million prior quarter position, and taken together, guru funds hold 1.5% of the outstanding shares-- approximately at par with their 1.6% weighting in the group. The top sellers were Viking Global Investors ($148 million) and Zweig-DiMenna Associates ($3 million). Overall, 749 institutions hold 79.8% of JCI shares, with Capital World Investors ($1.33 billion), Capital Research Global Investors ($942 million) and JP Morgan Chase ($873 million) being the top holders with 6.4%, 4.5% and 4.2% of the outstanding shares respectively.

JCI trades at a forward 8.5 P/E that is higher than the forward 7 P/E for the auto industry, and it trades at a 19.4 P/CF ratio that is also higher than the average 6.3 P/CF ratio for the auto industry.

Goodyear Tire & Rubber (GT) GT is one of the world’s largest tire companies and a very well-known worldwide brand as its tires are marketed in almost every country. It manufactures tires, engineered rubber products and rubber-related chemicals for transportation and industrial markets. Guru funds cut a net $27 million from their $259 million prior quarter position, and taken together, guru funds hold 6.6% of the outstanding shares-- significantly greater than their 1.6% weighting in the group. The top sellers were Appaloosa Management ($14 million) and SAC Capital Advisor ($6 million). Overall, 370 institutions hold 85.5% of GT shares, with Appaloosa Management ($187 million), Vanguard Group ($172 million) and Wellington Capital Management ($164 million) being the top holders with 5.7%, 5.3% and 5.0% of the outstanding shares respectively.

GT trades at a forward 5.5 P/E that is less than the forward 7 P/E for the auto industry, and it trades at a negative P/CF ratio as operating flow is negative on a TTM basis.

Paccar Inc. (PCAR): PCAR designs, manufactures, and distributes light-, medium-, and heavy-duty trucks and related aftermarket parts primarily in the United States and Europe. It is the third largest manufacturer of heavy-duty trucks in the world after Volvo and Daimler, and markets its heavy-duty diesel trucks under the Kenworth, Peterbilt, and DAF nameplates. The company sells its products for use in over-the-road and off-highway hauling of freight, petroleum, wood products, construction, and other materials. Guru funds cut a net $114 million from their $131 million prior quarter position, and taken together, guru funds hold 0.1% of the outstanding shares, significantly less than their 1.6% weighting in the group. The top sellers were Fisher Asset Management ($99 million) and Zweig-DiMenna Associates ($13 million). Overall, 441 institutions hold 57.4% of PCAR shares, with JP Morgan Chase & Co. ($729 million) and Vanguard Group ($576 million) being the top holders with 4.9% and 3.9% of the outstanding shares respectively.

PCAR trades at a forward 12.5 P/E that is higher than the forward 7 P/E for the auto industry, and it trades at a 9.7 P/CF ratio that is also higher than the average 6.3 P/CF ratio for the industry.

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General Methodology and Background Information: The latest available institutional 13-F filings of over 60+ legendary or guru hedge fund and mutual fund managers were analyzed to determine their capital allocation from among 50+ different industry groupings, and to determine their favorite picks and pans in each group. Each guru has been carefully selected based on their long-term performance and standing in the investment community. Furthermore, the credentials of most of the 60-odd guru funds that justify their inclusion in this elite group were detailed in our previous articles, many of which can be accessed by clicking on the hyperlinks referencing them in the above Table and in the article.

These legendary or guru fund managers number less than one percent of all funds and yet they control almost ten percent of the U.S. equity discretionary fund assets. The argument is that institutional investors have the resources and the access to information, knowledge and expertise to conduct extensive due diligence in informing their investment decisions. When high alpha generating or guru Institutional Investors by virtue of their fund performance, low volatility and elite reputation in the investment community, invest and maybe even converge on a specific investment idea, the idea deserves consideration for further investigation. The savvy investor may then leverage this information either as a starting point to conduct his own due diligence or even go as far as constructing a model diversified portfolio based on the guru funds best picks.

Disclaimer: Material presented here is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusion. Further, these are our ‘opinions’ and we may be wrong. We may have positions in securities mentioned in this article. You should take this into consideration before acting on any advice given in this article. If this makes you uncomfortable, then do not listen to our thoughts and opinions. The contents of this article do not take into consideration your individual investment objectives so consult with your own financial adviser before making an investment decision. Investing includes certain risks including loss of principal.


Source: Undervalued Auto Industry Picks By World Leading Fund Managers