The auto industry has been struggling this year after seven consecutive years of growth. This is especially true as auto sales dropped 1.8% year over year to an annualized 16.13 million units in August, marking the lowest level since February 2014. This was the eighth straight monthly decline in sales thanks to Hurricane Harvey.

Of the six major American and Japanese automakers, General Motors (GM – Free Report) and Toyota (TM – Free Report) saw sales increase of 7.5% and 6.8%, respectively, while Nissan Motor (NSANY – Free Report) and Fiat Chrysler (FCAU – Free Report) posted the biggest sales decline of 13% and 11%, respectively. Ford Motor (F – Free Report) and Honda (HMC – Free Report) sales were down over 2% each.

Hurricane Harvey: A Bane or Boon?

Hurricane Harvey has forced several dealers in the Houston area — the ninth-largest vehicle market in the nation — to shut down their stores due to flooding, power outage or other damage, thereby taking a toll on demand in the last week of August. As per Bill Wolters, president of the Texas Automobile Dealers Association, as many as 350 dealerships throughout the region was closed.

Notably, the region represents about 30-40% of Texas sales, which account for up to 9% of sales in the U.S., according to Barclays. As a result, the storm has cut sales of new cars and trucks by an estimated 20,000 vehicles per LMC Automotive while Cox Automotive estimates that Harvey has caused damage to as many as half a million vehicles.

However, the hurricane is expected to provide a boost to auto sales this month as people with damaged cars will replace them. Looking back at Superstorm Sandy that had caused devastation in New York City in 2012, vehicle sales in the New York area jumped 49%, following the month of the storm. Given this, Cox Automotive, the parent company of Kelley Blue Book, estimates that 300,000-500,000 vehicles will need to be replaced because of Harvey.

Higher demand will also help to kill excess inventory in the space, as automakers will move them to Houston. The biggest beneficiaries will be the makers of pickup trucks and SUVs, the most popular vehicles in the region.

Other Encouraging Factors

The industry trends are still favorable for automakers given the strong momentum in the U.S. economy with accelerating job gains, rising wages, increasing consumer spending and growing consumer confidence. Additionally, higher demand for light trucks and SUVs, a plethora of new models, fuel-efficient and technologically enriched vehicles, and low interest rates should lift car sales in the coming months.

Moreover, the auto sector has a solid Zacks Rank in the top 6% and the valuation looks appealing at the current level with a P/E ratio of 12.12, the lowest of all the 16 Zacks sectors. All these have set the stage for a rebound in auto sales in the coming months.

ETFs in Focus

First Trust NASDAQ Global Auto ETF (CARZ – Free Report)

This fund offers a pure play global exposure to 34 auto stocks by tracking the Nasdaq OMX Global Auto Index. It is a large-cap centric fund with higher exposure to the top five firms at over 7% share each while the other firms hold no more than 4.03% of assets. In terms of country exposure, Japan takes the top spot at 34.6% while the U.S. and Germany round off the next two spots with 22.6% and 18.2% share, respectively. CARZ has a lower level of $16.9 million in AUM and trades in a small average daily trading volume of around 4,000 shares. The product charges 70 bps in fees per year and has a Zacks ETF Rank #2 (Buy) with a High risk outlook.

iShares Global Consumer Discretionary ETF (RXI – Free Report)

While RXI provides broad exposure to the consumer discretionary space around the world, it has over 20% allocation to the auto industry. Holding 176 stocks, the fund is skewed toward the top firm at 9.3% while the other firms hold less than 4.6% share. American firms make up for 60.9% of the portfolio while Japan takes the next spot with a double-digit allocation. It has $244.2 million in AUM and charges 48 bps in annual fees. Average daily volume is light at around 17,000 shares.

First Trust Consumer Discretionary AlphaDEX Fund (FXD – Free Report)

This fund also targets the broad consumer discretionary segment with nearly 14% allocation to the auto industry. It holds 118 securities in its basket with each holding no more than 1.72% of assets. It has amassed $387.7 million in its asset base and trades in a good average daily volume of roughly 92,000 shares. It charges 61 bps in annual fees from investors and has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook.

Stocks in Focus

While most of the auto stocks would gain from Harvey-damage replacement, we have highlighted those that have the potential to move higher than their peers. To accomplish this, we have used the Zacks stock screener to find out the best stocks in the auto space having a Zacks Rank #1 (Strong Buy) or #2 and a VGM Style Score of A or B. The combination offers the best upside potential with strong momentum, cheap price and robust growth.

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 worldwide. The stock has seen positive earnings estimate revision of six cents over the past 30 days for this year but has a negative earnings growth rate of 1.07%. It has a Zacks Rank #1 with a VGM Style Score of B. 

SPX Corporation (SPXC – Free Report)

Based in Charlotte, NC, SPX Corporation is a provider of technical products and systems, industrial products and services, service solutions and vehicle components. The stock has seen solid earnings estimate revision of eight cents for this year over the past 30 days and has an expected earnings growth rate of 19.05%. It carries a Zacks Rank #2 with a VGM Style Score of A.

Dana Inc. (DAN – Free Report)

Based in in Maumee, OH, Dana is a provider of technology driveline, sealing and thermal-management products. The stock has seen positive earnings estimate revision of four cents for this year over the past 30 days and has an expected earnings growth rate of 20.10%. It has a Zacks Rank #1 with a VGM Style Score of B.