After performing incredibly over the past several months, the auto industry seems to have hit the brakes. This is especially true as sales dropped 6% year over year to an annualized 17.45 million units in May due to weak demand for sedans and fewer selling days, as per Autodata Corp. This marks the biggest monthly drop in nearly six years.  

Five of the six major American and Japanese automakers reported steep declines last month. General Motors (GM - Analyst Report) led the way with an 18% drop, followed by sales decreases of 9.6% for Toyota (TM - Analyst Report) , 6.1% for Ford Motor (F - Analyst Report) , 4.8% for Honda (HMC - Analyst Report) , and 1% for Nissan (NSANY - Snapshot Report) . On the other hand, Fiat Chrysler sales rose 1.5% year over year last month.

The numbers were discouraging as Americans generally boost their purchase of cars in May to take advantage of higher incentives and Memorial Day bonanzas ahead of the summer selling season. As a result, the decline could be a sign that U.S. auto sales are reaching a plateau after six straight years of growth – a streak not seen since the 1920s (read: Memorial Day Travel May See 11-Year High: ETFs in Focus).

However, the trends are still favorable for the automakers given that the momentum in the U.S. economy has picked up after a slowdown in the first quarter. Higher demand for sports utility vehicles, a plethora of new models, fuel-efficient and technologically advanced vehicles, low interest rates, easy availability of credit and the need to replace aging vehicles will fuel growth in the coming months.

As such, investors could view the current data and the resulting fall in the share price of automakers as an entry point. For them, we have highlighted a couple of ETFs and stocks from this corner of the market that are in focus and could be excellent choices in the coming months.

ETFs in Focus

First Trust NASDAQ Global Auto ETF (CARZ - ETF report)

This fund offers a pure play global exposure to 37 auto stocks by tracking the NASDAQ OMX Global Auto Index. It is a large-cap centric fund and is highly concentrated on the top four prime automakers – Honda, Ford, General Motors and Toyota – that combined to make up for 31.3% share. In terms of country exposure, Japan takes the top spot at 36.1% while the U.S. and Germany round off the next two spots with 23.2% and 19.1% share, respectively (read: Car ETF in Focus Post Mixed Auto Earnings).

CARZ has a lower level of $39.6 million in AUM and trades in a small average daily trading volume of around 9,000 shares. The product charges 70 bps in fees per year and has a Zacks ETF Rank of 3 or ‘Hold’ rating with a High risk outlook.

Consumer Discretionary Select Sector SPDR Fund (XLY - ETF report)

While XLY provides broad exposure to the consumer discretionary space, investors could go for this product as it has at least 7% allocation to the auto industry. It holds 91 securities in its basket and some well know automakers like Ford, General Motor, O'Reilly Automotive (ORLY - Analyst Report) and Delphi Automotive (DLPH - Analyst Report) make up for a nice mix in the portfolio (see: all the Consumer Discretionary ETFs here).

It is the largest and the most popular product in the consumer discretionary space with AUM of nearly $10.4 billion and average daily volume of more than 7.7 million shares. It charges 14 bps in annual fees and has a Zacks ETF Rank of 2 or ‘Buy’ rating with a Medium risk outlook.

Stocks in Focus

While all the auto stocks are in focus for the coming days, we have highlighted those that have the potential to move higher than their peers.

Lear Corporation (LEA - Snapshot Report)

Based in Southfield, Michigan, Lear Corporation is a global leader in designing, developing, engineering, manufacturing, assembling, and supplying automotive seating, electrical distribution systems, and related components primarily to automotive original equipment manufacturers worldwide.

The stock has an above-industry earnings and revenue growth rate of 19.69% and 4.12%, respectively, for this year. The PEG ratio of 0.58 versus the industry average of 1.11 reflects that the company is a solid value play at the current levels (read: 4 Sector ETFs at a Bargain).

LKQ Corp. (LKQ - Snapshot Report)

Based in Chicago, Illinois, LKQ is the largest nationwide provider of recycled OEM automotive replacement parts and related services, with sales and processing facilities and redistribution centers that reach most major markets in the United States.

The company’s earnings and revenue are expected to grow at a respective rate of 27.46% and 27.77% for this year, much higher than the industry average of 24.88% and 3.03%. The PEG ratio of 0.98 is well below the industry average of 1.23, suggesting that the stock is a bargain hunt.