Two Reliable Growth Stocks to Buy

Piyush is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

General Motors (NYSE: GM) is one of the largest automotive companies in the world and has a market cap in excess of $43 billion. After it declared bankruptcy, the US Treasury purchased about 500 million of its shares, so that the company could stay afloat. But as major economies around the globe slowed down, its shares declined. However the recovering Indian, Chinese and US economies present a bright future for the company and over the last 6 months its shares have risen by nearly 40%. The rally is expected to further continue, as the company recently decided to use its $5.5 billion cash reserves. in order to repurchase 200 million of its shares from the Fed. The Fed would still be left with a 19% stake, but the reduced external holding would allow General Motors to aggressively market its products, and with less bureaucratic loops.

General Motors to Head North

In the recent quarters, General Motors has reported a series of impressive results. Even though its shares have risen by 40%, its shares trade at a trailing P/E of only 10.20x, which is mainly due to its solid financial performance. It’s PEG of 0.96x and a forward P/E of 7.91x indicates that its shares are still undervalued. The long term Debt/Equity stands out to be merely 25%, which is significantly lower than the industry average. Its P/S equates to an impressive 0.29x and analysts at Barclays, UBS and RBC Capital, all have a buy rating on the stock, with price targets up to $35 (a 29.6% premium).

Reasons to Avoid Ford

The thing is if you pick a good stock in a bad industry, it may not perform exceedingly well. But if you pick a bad stock in a good industry, it may still deliver decent returns. I believe that Ford (NYSE: F) belongs to the second category. Yes its shares are up by 20% over the last 6 months, but the company is highly leveraged with its debt/equity ratio touching 5.35. The company is 21.4 times more leveraged than General Motors yet its shares have returned 50% lesser value to its shareholders, as compared to General Motors. Additionally its recent spree of vehicle recalls will hit its margins and market reputation, and in my opinion investors should stay distant from this one.

Toyota Motors : Firing on All Cylinders

Another giant, Toyota Motors (NYSE: TM) seems to be doing it right. Its debt/equity of .55 is high but not alarming. Trading at a forward P/E of 11.25x with a PEG of 0.40x, shares of Toyota Motors appear to be undervalued. Its management expects to sell 9.7 million vehicles in FY12, and 9.91 million vehicles in FY13. Unlike Ford’s huge dependence on pickup trucks, Toyota is recording sales growth in almost every model. Additionally, Toyota plans to unveil 21 new hybrid vehicles by 2015, to strengthen its hybrid vehicle’s market share. This would be beneficial over the longer run as emissions norms get more stringent.

Additionally, the company was able to cut its operating expenses by 8% in the recent quarter, and the management boosted its net income forecast by 3%. Analysts estimate its FY13 EPS growth to be around 14.1%, and its management aims to reclaim its “world’s largest auto manufacturer” tag by the end of 2013. Altogether, Toyota Motors appears to be a good buy, but the weakening Yen could hurt its earnings from international operations. But one should also note that Japan’s auto industry is showing signs of recovery. In November alone, Toyota’s domestic auto sales rose by 39.9% sequentially, with one of its domestic competitors recording as much as 71% increase.

A Short Conclusion

The rising per capita income and the dipping unemployment rate in the US is a big positive for the automobile industry. Yes most companies will head north, but picking up financially and fundamentally sound companies offers more growth. In my opinion, investors should take advantage of Toyota's and General Motor's cheap valuations as their pros outweigh their cons. However I believe that investors should stay distant from Ford due to its highly leveraged business model.


PiyushArora has no positions in the stocks mentioned above. The Motley Fool owns shares of Ford. Motley Fool newsletter services recommend Ford and General Motors Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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