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The Auto Industry Renaissance Is for Real

Written by: Stockpickr Staff 03/08/12 - 5:57 AM EST
Tickers in this article: GM F
NEW YORK (Stockpickr) -- After a gut-wrenching industry downturn in 2009, the auto industry began to stage a remarkable recovery in 2010, and investors began to look further down the road to even more gains. Almost every company shed a huge amount of fixed costs and looked poised for record profits as industry sales volumes slowly rebounded.

Shares of Ford Motor(F) , for example, quickly surged to nearly $20 by early 2011. And GM's(GM) late-2010 IPO saw such a hearty reception that investors scored a quick 20% gain in just a few months. Many auto parts suppliers also saw their shares rise up to fresh post-crisis highs.

And then, the bottom fell out -- again. Ford, GM and those suppliers have seen their stocks fall 30% or even 40% from those peaks over the last year as investors suddenly lost their enthusiasm for this resurgent sector.

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Remarkably, the auto industry's outlook is even brighter than it was a year ago, and for investors willing to ride out the storm, major gains can be made.

For specific auto industry stocks to consider, check out "5 Cheap Stocks for an Auto Industry Renaissance."

The Leverage of Volume

After selling 16 to 17 million units annually, the auto industry suffered a massive shock as industry volumes fell to just 10.4 million. Decent profits morphed into huge losses, sending some players into bankruptcy, while others barely stayed afloat. Many auto parts suppliers saw their stock move below $1.

But that shock may have been the best thing to ever happen. In an industry known for bloated cost structures and barely competitive products, the systemic shock led to a wave of cost cuts and better product line-ups.

Just a year after the nadir of the economic crisis, profit margins started to sharply rebound, and with lower costs in place, those were on path to reach record levels in just a few short years. Though industry sales rose just 11% in 2010 to 11.55 million units, almost every industry player managed to move back into the black.