Though the U.S. auto industry is facing tough times given higher interest rates, rising vehicle prices and the threat of tariffs on auto imports, it has shown resiliency. Auto sales in August are expected to rise 1.2% and 0.8%, respectively, per Edmunds.com and Cox Automotive.

Attractive Labor Day discounts and a booming economy buoyed by 18-year high consumer confidence and two-decade low unemployment rate have aided the momentum. Additionally, higher demand for comfortable SUVs and pickup trucks drove sales higher.

Of the six major American and Japanese automakers, Fiat Chrysler (FCAU - Free Report) led the way with sales climbing in double digits. This was followed by an increase of 4.1% for Ford Motors (F - Free Report), 4% for Nissan Motor (NSANY - Free Report), and 1.3% for Honda (HMC - Free Report). However, Toyota (TM - Free Report) saw a decline of 2% in auto sales last month. General Motors (GM - Free Report) sales also dropped 13% per The Detroit News.

Challenges Ahead?

Consumers have long been shifting from traditional passenger cars to larger and more comfortable pickup trucks, SUVs and crossovers. But the number of new models is now growing faster than demand, threatening the fat profits that automakers have enjoyed over the past several years. Additionally, higher rates have made financing of new vehicles expensive.

Further, the potential tariffs on cars and auto components and NAFTA renegotiations are the greatest threats to the auto industry. Per Cox Automotive, rising interest rates coupled with possible tariffs could raise new vehicle prices and payments and cut into auto sales in the second half.

While this year has been a challenging one, a strengthening economy, low unemployment, increasing consumer confidence, higher spending, fuel-efficient and technologically enriched vehicles, and robust demand for larger vehicles will continue to drive the industry. In addition, tax cuts are boosting consumers’ spending power, leading to higher demand for vehicles.

Further, the auto sector has a compelling valuation with a P/E ratio of 10.70, the lowest of all the 16 Zacks sectors. This could provide a boost to the stocks this year. That said, we have highlighted the pure play auto ETF & a few stocks that could be attractive picks.

First Trust NASDAQ Global Auto Index Fund (CARZ - Free Report)

This fund offers global exposure to 34 auto stocks by tracking the NASDAQ OMX Global Auto Index. It is moderately concentrated on the firms, with each making up for no more than 8.5% share. In terms of country exposure, Japan takes the top spot at 36% while the United States and Germany round off the next two spots with 21% and 19% share, respectively. CARZ has a lower level of $18.2 million in AUM and trades in a small average daily trading volume of about 5,000 shares. The product charges 70 bps in fees per year and carries a Zacks ETF Rank #3 (Hold) with a High-risk outlook.

Meritor Inc. (MTOR - Free Report)

Based in Troy, MI, Meritor is engaged in designing, developing, manufacturing, marketing, distributing, selling, servicing, and supporting integrated systems, modules, and components to original equipment manufacturers (OEMs) and the aftermarket for the commercial vehicle, transportation, and industrial sectors. The stock saw no earnings estimate revision in the past 30 days for this fiscal (ending in September 2019) but has an impressive expected earnings growth rate of 57.45%. It sports a Zacks Rank #1 (Strong Buy) and has a VGM Score of A. 

Commercial Vehicle Group Inc. (CVGI - Free Report)

Based in New Albany, OH, Commercial Vehicle supplies interior systems, vision safety solutions, and other cab-related products for the global commercial vehicle market, including the heavy-duty (Class 8) truck market, the construction market and other specialized transportation markets. The stock has seen solid earnings estimate revision of 9 cents over the past 30 days for this year with an estimated earnings growth rate of 218.2%. It has a Zacks Rank #1 and a VGM Score of A.

Allison Transmission Holdings Inc. (ALSN - Free Report)

Based in Indianapolis, IN, Allison Transmission is engaged in the manufacturing of fully-automatic transmissions for medium- and heavy-duty commercial vehicles, medium- and heavy-tactical U.S. military vehicles and hybrid-propulsion systems for transit buses. The stock witnessed no earnings estimate revision over the past 30 days for this year and has an expected earnings growth rate of 66.54%. It has a Zacks Rank #1 and a VGM Score of C.