Betting on a U.S. Automotive Rebound

Nicholas Vardy

Nicholas Vardy has a unique background that has proven his knack for making money in different markets around the world.

Last week was a rough one for global stock markets, with the Dow Jones down 2.14% and the S&P 500 dropping 2.11%. Global markets fared slightly better, with the MCSI Emerging Markets Index down only 0.56%.

As a result of last week’s weakness, you were stopped out of FleetCor Technologies, Inc. (FLT) on Friday at $70.25 amid exceptionally volatile trading.

This week’s Bull Market Alert recommendation is Delphi Automotive (DLPH). Delphi is one of the nation’s largest automotive suppliers and a leader in integrated audio, video and navigation systems that keep the nation’s drivers both informed and entertained while driving. Delphi also makes collision warning systems now required by law on all new automobiles.

Here’s why Delphi’s stock has been in a steady uptrend and why I believe it will continue rising in the months ahead.

First, the advanced safety features on U.S. automobiles aren’t just high-end options any more. They are required by federal law. Imagine the advantages of having Uncle Sam force consumers to buy your product. New regulations have Delphi benefiting from major trends in the automobile industry to make cars that are safer and more fuel-efficient than ever before.

Second, Delphi’s prospects have improved along with the rebounding U.S. car market. This year, U.S. manufacturing industry sales of new cars and trucks will exceed 15.3 million, up from 14.4 million in 2012. By 2015, sales of new cars and trucks will hit 16.4 million annually. And a lot of these cars will be equipped with Delphi-manufactured products.

Third, Delphi is a turnaround play that is just getting started. The company recently dumped much of its unprofitable European businesses. Although the company has to write off $300 million over the short term, the restructuring improves Delphi’s longer-term outlook.

Delphi’s revenues are projected to climb about 9% annually over the next few years, lifting sales to $22 billion by 2016 from $16 billion today. Earnings per share will expand even faster — about 18% annually, or 95%, over the next 48 months. That’s also why Delphi’s price/earnings to growth (PEG) ratio, which incorporates both the price/earnings (P/E) multiple and analysts’ consensus estimates of earnings growth is a mere 0.6, making the stock extremely attractive at current levels.

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No wonder Delphi is attracting some big bets. Centerbridge Partners, a $1 billion-plus hedge fund, has bet an astonishing one-third of its portfolio on Delphi. Billionaire Dan Loeb’s Third Point had at least $50 million invested in Delphi at the end of December. John Paulson also owns 13.5 million shares.

So buy Delphi Automotive (DLPH) at market today and place your stop at $37.00. For potentially bigger gains, buy the August $42.50 call options (DLPH130817C00042500).

Also, go ahead and buy last week’s recommendation, Melco Crown Entertainment Limited (MPEL), at market today, and place your stop at $19.50. I’ll be recommending options on this pick at a later date.

Portfolio Update

Bank of Ireland (IRE) closed flat last week. The European Union recently gave Ireland a seven-year extension on re-payment on its bailout loans, giving it more breathing room to continue its economic recovery. This news is bullish for IRE, which remains a BUY.

ProShares Ultra MSCI Japan (EZJ) dipped just 0.57% over the past five trading days. Japanese shares powered to nearly five-year highs overnight as the recent Washington, D.C., gathering of the “Group of 20” gave its collective endorsement of Japan’s new economic policies. EZJ remains a BUY.

Sony Corporation (SNE) traded flat last week, but managed a small bounce from its 50-day moving average last Friday. Sony is one of the few major players in the multi-billion dollar home video game console space. Video game console sales have slowed considerably as of late in anticipation of the “next generation” consoles coming out later in 2013. Although Sony has made mention of its new Playstation 4 console, details have been limited. With earnings due on May 9, any news on Sony’s future console may spur SNE higher as the holiday season should bring massive demand for the “next big thing” in video gaming. SNE is a BUY.

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