Tata Motors, Spartan Motors, Polaris Industries Inc. (PII), Arctic Cat Inc. (ACAT), and SORL Auto Parts, Inc. appear to be taking a bullish cue from Toyota Motors (TM) and Ford Motors (F), and are this week's biggest small cap gainers.
In a feat that's likely to shock most market participants, this week's 'winningest' small cap stocks were automobile manufacturer stocks. The S&P 600 Automobile Industry Index is going to close more than 20 percent higher for the week, thanks to big gains from the likes of Spartan Motors, Inc. (SPAR), Polaris Industries Inc. (PII), Arctic Cat Inc. (ACAT), Tata Motors Ltd. (TTM) and SORL Auto Parts, Inc. (SORL).
Given the auto industry's recent woes, a closer look from investors at the reason why is merited.
In all fairness, it was the bigger brothers in the automobile industry doing most of the heavy lifting. Toyota's (NYSE:TM) North American operations are expected to be profitable again in 2010 on the heels of sales of 12 million cars nest year. The company only expects to sell about 10 million this year.
Ford Motors (NYSE:F) already posted a profit of $2.3 billion for its second quarter. Granted, the profit only materialized because of a $2.8 billion special accounting item, but even on an operating basis the company is doing better than (1) it has been, and (2) than it was expected to.
Small cap investors, putting two and two together, are starting to believe if the major names in the auto maker group are seeing a light at the end of the tunnel, than the smaller ones must be as well.
Tata Motors Ltd. (TTM) is one of the biggest gainers for the week, up 12.9% despite the company's indecision about how to proceed with cash-bleeding Jaguar and Land Rover.
SORL Auto Parts, Inc. (SORL) has gained nearly 18% this week. Though not a full-blown car manufacturer per se, the Chinese-based auto parts maker is deeply entwined (much more so than most auto component makers) in the industry's success.
One of the compelling - not to mention amazing - factoids about SORL is that it's remained profitable through out the recession.... they must be doing something right, and investors are willing to bet they'll really be doing it right if Toyota and other car manufacturers really do climb out of the red and into the black next year.
The industry technically includes some 'non-car' names too..... like Polaris Industries Inc. (PII) and Arctic Cat Inc. (ACAT). Both of those stocks are higher for the week as well; Arctic Cat shares look particularly interesting as a possible turn-around play following a terrible 2008 and an oddly week first half of 2009.
(Note: Most of these small cap stocks are not technically S&P 600 constituents, but all these stocks still tend to trade as a flock.)
The only big small cap loser from the automobile manufacturer world this week has been Spartan Motors, Inc. (SPAR), which lost 14.4% of its value, mostly in front of the announcement of positive earnings results last quarter. In fact, the stock hasn't fallen since the numbers were posted on Thursday.
As for fundamentals and forecasts for these companies, don't worry or bother with them yet - most of the outlooks for these stocks haven't been updated in light of the recent industry improvements. Even so, some of the dated ones were fairly encouraging. Spartan's forward-looking P/E is 11.4, while SORL's is 18.3. When the estimates are updated, the numbers could be even better.
Our take? If Ford and Toyota aren't blowing smoke, then by default the smaller players in the arena are probably as attractive as investors seem to think they are this week. On a year over year basis nobody should expect great things, but these stocks were actually beaten up a little more than their respective company's top lines were during the recession. Perhaps it's time to go shopping for long-term value.
And, from a technical perspective, the momentum has clearly shifted - upward - for the S&P 600 Small Cap Automobile Index. Volume's a little light so far, but that's the case with all new trends.
Small Cap Auto Makers Win the Week - TTM, SPAR, SORL
as well as some of the individual stocks.
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