Research by Tweedy, Browne Company LLC and others indicates that stock markets tend to overreact both to good and bad news and that the long-term earnings potential of both a random selection of formerly poor earnings companies and of excellent earnings companies tends to be "just" average. While average earnings for a previously superior earnings company's shares leads generally to much lower prices, the same average earnings for a once bad earnings company's shares leads to significantly higher prices, everything else being equal. The markets love positive surprises and hate negative ones.
These facts may be relevant currently with respect to two industries: auto/truck and replacement auto parts.
For a variety of reasons, among them concerns over a slower economy, higher interest rates, higher gasoline prices, the recent presidential election limbo, and pessimism about the auto parts industry's viability (in an era when highly sophisticated, computerized vehicles may lead car and truck owners to turn to dealers, rather than separate, replacement auto parts companies, for help with auto repairs), both automobile/truck company shares and those of replacement auto parts companies have been beaten way down over the last many months.
In fact, they seem to be so out of favor as to be discounting not just a recession but also high inflation and a conversion from the internal combustion engine to environmentally friendly vehicles.
Unless you think that folks will no longer be buying more conventional cars and trucks and, when times are not so good, also no longer trying to save money by keeping them on the road with new parts, the sell-offs appear to be overdone.
This is not to say that the stock prices of these companies will not continue to go down. They may, in the short-term, go either down or up. We do not advocate trying to time the market, much less single industries. But we do suggest that, from a value-oriented, contrarian point of view, there are bargains out there now. In the view of "Grant's Interest Rate Observer," it may be time to begin nibbling at the best values, with a gradual approach to major purchases, to be held for the long-term.
The very finest steals, though also the highest risks, appear to be in the replacement auto parts industry alone.