Fear is a powerful emotion.
It can short-circuit rational thinking and lead to error-prone decision making.
There is a lot of fear in the auto industry because of electric cars, self-driving cars and ride-hailing companies, and investors have taken notice.
But here are three auto businesses that provide the opportunity to profit from other investors' fears.
Cumminsis an industrial company that designs, manufactures and distributes diesel and natural-gas engines, and it is the global leader in diesel engine manufacturing. Last year, Cummins earned $1.4 billion in profit on $19 billion of sales.
But this is a difficult time for Cummins. It is getting squeezed by slowing economic growth in emerging markets, the strong dollar and the collapse in commodity prices over the past two years.
Revenue fell 1% last year, driven by an 11% decline in international sales. However, the North American market remained firm, with sales rising 7%.
Among Cummins' product categories, engine sales and power generation sales fell 11% and 14%, respectively, last yer. This is problematic for the company because these two segments collectively represent nearly two-thirds of total annual revenue.
Things haven't gotten to a much better this year. First-quarter sales fell 9% from a year earlier, due to lower production in the North American heavy-duty truck market and weak global demand for off-highway and power generation equipment.
Cummins' earnings per share fell 12% year over year, and the company expects difficult conditions to continue for the rest of the year.
Management's guidance calls for a 5% to 9% decline in full-year sales.
Cummins is banking on growth in new markets to reignite revenue growth. The company noted that it made significant progress in this area last year, including adding market share in China.
This will specifically boost Cummins' components segment, which reported an increase in sales in China both in the fourth and first quarters.
Nevertheless, Cummins remains highly profitable and rewards shareholders with compelling cash returns.
Cummins' $3.90 a share annual dividend provides a solid 3.5% yield. That is a higher than the 2% average yield of the S&P 500.
In addition, Cummins has a long track record of high dividend growth. In the past four years, it has increased its dividend by 25% each year.
Cummins stock trades for a reasonable price-earnings ratio of 15. If the company can return to revenue and earnings growth in 2017, the stock could reward shareholders over the next several years.
The company's mix of potential growth, value, shareholder-friendly management,and market dominance in diesel engines make it a favorite of The 8 Rules of Dividend Investing.
Ford stock is very cheap, with a forward P/E ratio of just 6. With such a multiple, investors appear convinced that Ford's excellent performance won't last.
U.S. automakers are fresh off a record year and are still performing well to start 2016. Ford is benefiting from persistently low gas prices and low interest rates.
Ford's growth will likely be powered by sales in new markets. The desire to expand in under-developed nations has led Ford to invest $1.6 billion to build a factory in Mexico, which will manufacture small cars.
In the meantime, Ford's total car sales in the United States rose 5% last year. Specifically, the F-Series pickup truck is still the most popular vehicle in America, holding that distinction for the past 34 years.
Last year, Ford generated $10.8 billion in pretax profit, a company record.
Ford's success has continued this year. March sales of more than 254,000 were the best in 10 years, representing 8% growth from a year earlier.
Meanwhile, Ford's first-quarter earnings were the best since 2006, with earnings per share more than doubling and net income rising to $3.8 billion, up from $1.7 billion a year earlier.
Ford expects its 2016 performance to match last year's or even improve somewhat.
The stock pays an annual dividend of 60 cents a share, which results in a hefty 4.5% dividend yield.
No stock exhibits the fears surrounding the auto industry more than GM.
The company is highly profitable, and its sales are growing, yet investors remain extremely bearish.
GM expects adjusted earnings of $5.25 to $5.75 a share this year, which gives the stock a forward P/E ratio of just 5.
Sentiment remains extremely negative, due mostly to worries over declining economic growth in key international markets such as China. China is a critical region for GM because of its large population and rising middle class, and it could be a major source of growth for the company.
But the reality is that GM is doing very well in emerging markets. For example, GM's April sales in China totaled more than 277,000 vehicles, up 7.5% from a year earlier.
GM's strong sales growth is accompanied by rising profit margins. The company generated $2 billion in first-quarter profit, while its adjusted earnings clocked in at $1.26 a share, a first-quarter record.
GM's improved profitability and rising earnings allow the company to increase its dividend. The company raised its dividend in January, and the new $1.52 annualized dividend provides a 4.9% dividend yield.
The company's dividend results in a 27% payout ratio based on this year's earnings expectations. The stock has a low payout ratio, which should provide enough flexibility to continue raising the dividend for many years.
Since GM began paying dividends in 2014, it has raised its dividend by 12% per year.
GM is benefiting a great deal from falling oil prices and low rates in the United States.
The stock is very cheap, but considering its strong results this year and potential for future growth in new markets, it may not stay inexpensive for long.
GM is one of Warren E. Buffett's highest-yielding stocks. His holding company, Berkshire Hathaway has invested more than $1 billion into GM's stock.
This article is commentary by an independent contributor. At the time of publication, the author was long CMI.