Wall Street's Automotive Love Affair

NEW YORK ( TheStreet) -- America has long been infatuated with the automobile, but typically getting involved with a car will cost you money. Wall Street is rapidly warming to the automobile sector, as it could potentially make you money.

Just this morning, both Bank of America/Merrill Lynch wrote a positive industry piece on the sector and on specific names. "After a near disastrous fate in 2009, it is arguable that the US auto industry is now helping lead the US economic recovery, and there is still much more room to go. In fact, we expect the next peak in auto sales to hit 18 million in 2018, which is well above 2012's level of 14.4 million and the trough of just 10.4 million in 2009," Bank of America penned in the note.

Over at Breakout Stocks, we are looking for a less obvious way to play the theme, a theme which we began playing back in January of 2013.

We discovered automotive component manufacturer TRW Automotive Holdings ( TRW) - now Breakout Stocks largest position. We settled on TRW, which sells to both General Motors ( GM) and Ford ( F), because of its product focus on safety components, which has allowed the company to benefit from a secular shift to increased safety content per vehicle that has been driven by increasing regulations.

The company's European exposure (42.5% of 2012 sales) is another attractive attribute. We believe that Europe is in the process of stabilizing, and expectations for the region remain low. Should there even be the perception of a glimmer of hope in terms of macroeconomic reacceleration in Europe, we believe TRW could come into greater favor amongst investors who will get double exposure to both an improvement in the automotive sector, and increased exposure to an improving European economy. TRW generated 36.1% of its 2012 sales in North America and 17.3% in Asia.

We expect the company will be able to continue to improve its margins while lowering its debt. The stock trades at 8.6 times 2014 consensus expectations of $7.36 per share. We see upside in the shares into the $80s. TRW generates robust cash flows and is aggressively repurchasing its shares. We consider this a good time for investors to pull into a new position.

We've long been inspired by the great Wayne Gretzky who said ""I skate to where the puck is going to be, not where it has been" and we try to craft our stock picking along similar lines, as we try to anticipate which sectors will find favor in Wall Street's eyes and establish our positions there first.

By focusing on an auto supplier, we get to play the broad industry trend with a mitigated risk of a specific auto platform shortfall.

-- Written by Bryan Ashenberg in New York

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In keeping with TSC's editorial policy, Bryan Ashenberg doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. He appreciates your feedback; click here to send him an email.

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