The automotive industry, particularly the used car and aftermarket sectors, is expected to keep growing at a decent clip in the coming months thanks to a continuing trend in which the public is shying away from using public transport. However, not all automotive-sector stocks are well positioned to benefit from the industry tailwinds. For instance, we think the current valuations of Carvana (CVNA) and CarParts.com (PRTS) are not justified by their financials or growth prospects. So, these stocks are best avoided now. Let’s discuss.Automobile and auto parts sales took a major hit during the worst of the COVID-19 pandemic. But the demand for used cars and aftermarket auto parts and accessories increased later, with people moving to get their old cars fixed or buy used cars to avoid using public transportation. As the economy has started to recover, the overall industry has been witnessing a decent growth. While it is still grappling with a semiconductor chip shortage, it’s future growth looks hopeful with government support for the electrification of vehicles and proposed investment to address the semiconductor shortage.
According to Grand View Research, the global automotive aftermarket is expected to expand at a 3.8% CAGR from 2021 - 2028, to reach $529.25 billion. Investors’ increasing interest in automotive stocks is evident in First Trust NASDAQ Global Auto Index Fund’s (CARZ) 98.5% returns over the past year versus the tech-heavy Nasdaq's 45.9% returns.
However, not all auto stocks are well positioned to capitalize on the industry tailwinds. Carvana Co. (NYSE:CVNA) and CarParts.com, Inc. (PRTS) currently look overvalued considering the bleak growth prospects. So, we think it wise to avoid these stocks now.