Hot Wheels

Time for the rubber to hit the road. A new acorn in the tire sector.

In Monday’s note, ‘Together in Electric Dreams’, I mentioned the recent discussion that

YWR: Your Weekend Reading

’s Erik and I had with Gray Oak Capital Management’s Steven Schlegel on the current investment opportunity in the automotive sector.

I was excited to meet Steven after reading his positioning piece for a new fund that he published last September. Steven’ analysis focuses on the connections between the US automotive depreciation cycle and earnings upturns for the automotive sector and its suppliers (on a lag).

He has looked at some very long data sets, going through annual reports of auto component suppliers since the 1970s to track margins. A number of charts from his report really jumped out at me.

The reliability of the average age of US cars as a predictor of US vehicle sales on a 7-year lag. Source: Schlegel, Gray Oak Capital Management

This ‘depreciation cycle’ also maps with CPI adjusted chart of the S&P Auto index, but on a faster lag as equities anticipate the sales pick up.  Source: Schlegel, Gray Oak Capital Management

Steven goes on to note that some of the biggest winners in an automotive upturn have historically come from the auto parts supply chain. So, let’s have a look at that universe. For the most part, it is small and midcap names. Even the majors in the sector, Aptiv (formerly Delphi) and Magna, are rounding errors in global equity indices.

A global auto supplier universe. Data from Koyfin.

Most have struggled to deliver meaningful shareholder returns over the past 5 years. The pandemic certainly took its toll on the space which now trades on average at a 25% discount to the global automotive OEMs on a forward EV/Sales multiple basis.

It could well be their time, and the 🐿️ suspects that the space is a fertile hunting ground for mid cap stock pickers. Alternatively, for those of you in the allocator business, I would suggest a chat with Steven about his fund. Please get in touch if you would like to be connected.

I was, however, keen to move our conversation to the next topic…tires (or tyres for my British and Australian readers!). Let’s burn some (largely synthetic) rubber…

Only in Vegas! Even without the ‘donut’ performance art, these 3,500kg Mercedes G-Wagons are going to shred a lot of rubber!