The 3 Best Auto Stocks for Your Portfolio

By Markets Fool.com

Products like the Fusion sedan have completely changed consumers' view of Ford in recent years. Image source: Ford Motor Company.

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Lately, it seems that lots of investors are eyeing auto stocks. Concerns about the U.S. auto-sales cycle (which might be peaking) and high-tech disruption (which might be disruptive) have pushed shares of the big automakers down to surprisingly low valuations. Yet many are healthy businesses paying strong dividends -- and some are well-positioned to thrive as technological innovation transforms the industry.

Here are three stocks that our Foolish contributors like a lot right now:Ford(NYSE: F),General Motors(NYSE: GM), andTesla Motors(NASDAQ: TSLA).

Ford: a value-priced icon

Sean O'Reilly: I have been consistently amazed for the last eight yearsby the story over at Ford. Not only did itnothave to declare bankruptcy in the Great Recession, but it hunkered down and created a fantastic lineup of automobiles as the economy began to rebound (full disclosure: I may be biased, as I still miss my 2009 Ford Fusion).

What is perhaps more amazing about Ford's history over the last eight years is its valuation. I'm not the first one to point this out, and I am just as puzzled as everyone else. We are all aware of the primary bear case: Auto sales are at a cyclical peak and it's all downhill from here. Fair enough. However, even if Ford and its peers were to sell slightly fewer cars in the years ahead, the 113-year-old auto manufacturer is just too cheap to pass up.

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Shares havefallen a bit post-earnings, thanks mostly to soft near-term guidance. The drop gives Ford a current market capitalization of around $47 billion. This seems more than fair, given last year's revenues of $149.6 billion, net income of $7.37 billion, and free cash flow of $8.97 billion. Looking ahead, the picture is much the same. In fact,management forecastthat margins and pre-tax profits for fiscal year 2016 would be at least equal to the previous year's results. At valuations like this, I would hope the board would start thinking about a healthy buyback program before it's too late.

All in all, investors today have the opportunity to own a premier American brand, one that finally got its European operations in the black and continues to expand in China, at just 6.4 times earnings and 5.2 times free cash flow. Add a dividend yield of 5% as icing on the cake, and Foolish investors have a great opportunity in front of them.

General Motors: poised to lead the future

John Rosevear:The U.S. new-vehicle market hasprobably peaked, China's is looking shaky, and new high-tech entrants likeTesla Motorsare threatening the big automakers like never before.

So why do I thinkGeneral Motors-- yes,thatGeneral Motors -- is a stock that might belong in your portfolio?

Here's why: This isn't the GM of old. In fact, it's nothing like that pre-bankruptcy behemoth, that pushed so-so products at profit-robbing discounts to prop up what remained of its market share.

Under CEO Mary Barra, this GM plays a very, very different game, one that's focused on profits and margins and returns on investments. The best part is thatto some extentit's still flying under investors' radar.

Would you believe that J.D. Power rates GM's qualityon par with the best from Japan? Or that GM is emerging asa leader in the self-driving-car revolution? Or that GM has been postingrecord profits, with eye-popping operating margins?

Yes,thatGeneral Motors. Remember, for all of Tesla's high-tech sheen, it's GM that will be first to market with anaffordable 200-mile electric car.

GM is currently gearing up to start production of the Chevrolet Bolt; the innovative electric crossover is expected to begin shipping in the fourthquarter. Image source: General Motors.

Under Barra, GM might be the best-positioned of all of the big automakers for the technological changes coming to the industry. But as those quality ratings attest, GM hasn't neglected its current business, either: Its pickups and SUVs are in such hot demand that it's boosting production in the U.S., and its latest SUVs are driving big sales growth in China, too.

That's all to say that GM has finally become the kind of well-run, forward-thinking company that we all like in our portfolios. On top of that, its price took a big hit after rival Fordmissed estimates last week, and another after July sales were a little weaker than expected. Right now, it's cheap at just 4 times earnings, and paying a 4.6% dividend yield that itintends to sustain through the next economic downturn.

Barra says that investors should think of GM as both a growth story and a dividend stock right now. I think she's right -- and at current prices, I say it deserves a very close look.

Tesla Motors: a story with great potential

Rich Smith: As a value investor, I'm not ordinarily attracted to profitless "story stocks" likeTesla Motors. But I have to admit that the more I look at it, the more I think Tesla stock could turn out to be an excellent auto stock for an individual investor's portfolio. Here's why.

Currently, Tesla is manufacturing cars at a rate ofless than 100,000 units a year. It's a small-fry automaker for now, but it does have potential. Consider that between March 31, when it first began taking reservations for purchase of its Model 3 electric sedan, and May 15,Tesla Motorsracked up 373,000 pre-ordersfrom unique customers. (That's fewer than the "400,000 orders" number that's been widely discussed, because Tesla has seen 8,000 orders canceled by customers, and canceled 4,200 more orders itself, on the belief that they were duplicates.)

The concept version of Tesla's upcoming Model 3. Image source: Tesla Motors.

Any way you cut it, 373,000 pre-orders for a car that doesn't exist yet, and won't begin delivering until next year, shows some pretty impressive enthusiasm out there for the Tesla brand. That enthusiasm, and that brand, is worth something, even if we can't yet quantify it in "P/E" form.

As for how muchmoreTesla stock could be worth in the future, that willdepend largely on the P/E. So how big will Tesla's earnings be in years to come?

Last month, analysts at Sterne Agee postulated thatTesla might earn $10 per sharein profits by 2018, then grow that 70% to $17 per share in 2019. So whileone way of looking at the company isthat investors are paying $234 for negative Tesla earnings today, it might be just as accurate to say that investors today, if they're patient, could end up paying only 23.4 times what Tesla will earn two years from now. And if Tesla is growing positive earnings at 70% in 2018, then paying 23.4 times earnings for a 70% growth rate could soon turn out to be a very cheap price.

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John Rosevear owns shares of Ford and General Motors. Rich Smith has no position in any stocks mentioned. Sean O'Reilly has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Ford and Tesla Motors. The Motley Fool recommends General Motors.

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