Auto Stocks Are Uglier Than AMC Pacer - TheStreet

DETROIT (

TheStreet

) -- This has been a grim year for Detroit.

Ford

(F) - Get Report

is now the only company that's financially viable from America's Big Three, after

General Motors

(MTLQQ)

went bankrupt -- for a spell -- and

Chrysler

collapsed into the arms of Italy's

Fiat

.

Related Article: Ford Shares Surge on Plans for Mightier Mustang

Big Japanese auto makers like

Honda

(HMC) - Get Report

,

Toyota

(TM) - Get Report

and

Nissan

(NSANY)

may appear to be the Best Three since they're by far the most popular brands after the faltering Americans. But car companies from Korea, such as

Hyundai

and subsidiary

Kia

, are the most improved brands, helping to chip away at Japan's perceived dominance and superiority to claim the top spot in the not-too-distant future.

American car companies' sales dipped 6.8% in November compared with a year earlier. Every other region added sales, with Korean companies boosting sales by 34%. Honda's sales fell 2.9%, while Toyota's rose 2.6%, though both manufacturers' sales have declined 23% in 2009, better than the Big Three's average of 29%. Nissan's sales jumped 21% in November, yet have dropped 22% this year.

Shares of Toyota and Honda have beaten the

S&P 500

over the past year. Toyota has gained 38% and Honda tacked on 68% versus the S&P 500's 30% increase. Nissan has surged 165%. Investors had fewer choices, with GM going under and remerging in a smaller form, and Chrysler operating as a closely held company before being propped up by Fiat.

Ford has performed extremely well over the past year, with its stock gaining 350%. Ford's shares were beaten into the low single digits when Detroit was ready to call it quits. But the company has proven itself to be far more sustainable than its American brethren. It even has won awards, such as 2010 Motor Trend Car of the Year for the Fusion.

Toyota's poor sales performance may be a result of the International Institute for Highway Safety's most recent crash-test report, which failed to list a single Toyota model as a "top safety pick." Adding to that, cars from auto makers that aren't usually synonymous with quality, like Hyundai, have joined Toyota at the top of quality reports by J.D. Power and other independent rating agencies, while its own Scion brand has fallen to near the bottom of the rankings.

With returns on equity in the low single digits -- and even negative in Toyota's case -- the automotive industry isn't attractive. The strong performances of

Volkswagen

and Hyundai, which has seen sales increase by more than 6% this year, are almost irrelevant for most investors since neither has a primary or ADR listing in the U.S.

Toyota's dominance has been whittled away by bland styling and the surge of Korea. As the current king of the hill, Toyota knows it may slip from the top spot. Toyota and Honda make a fine product, but for investment returns, neither are a reliable bet. Unless you can grab some shares of Hyundai, now may be a good time to sit out the auto industry and look for greener pastures elsewhere.

-- Reported by David MacDougall in Boston.

Prior to joining TheStreet.com Ratings, David MacDougall was an analyst at Cambridge Associates, an investment consulting firm, where he worked with private equity and venture capital funds. He graduated cum laude from Northeastern University with a bachelor's degree in finance and is a Level III CFA candidate.