Some of the most well-known auto-related stocks in the market have had a terrible month as fears over rising interest rates call into question consumer demand for cars, trucks and SUVs.

Shares of General Motors (GM) , Ford  (F) , BorgWarner (BWA) , Adient (ADNT) , Tenneco (TEN) AutoNation (AN) and Sonic Automotive (SAH) have fallen an average of 9% over the past month, almost five times the drop in the S&P 500

But, one investment bank believes the concerns on consumer demand for autos -- and the appetite to hold the stocks -- are overblown. Their reasoning: auto stocks have surprisingly performed well during periods of rising interest rates. 

"Surprisingly, in periods of rising rates auto sales tend to increase -- this likely reflects the benefit of a strengthening economy and declining unemployment, which offsets the headwinds from rising interest rates," says UBS analyst Colin Langan. "Overall, we remain optimistic U.S. sales will be steady in 2018, helped by positive consumer sentiment and a strong economy as well as corporate and consumer tax reform which should boost demand and support new & used pricing."

Langan reasons that consumers won't be too turned off by estimated monthly bills while sitting in the dealer waiting to leave in a new ride. Using an average amount financed of $30,329, a 100 basis point increase in rates adds about $14 a month to a person's payment. A 200 basis points increase lifts the monthly payment by roughly $29.

Not all the stocks are a buy on the most recent pullback, Langan cautions.

Higher interest rates are likely to clip profits for dealerships like AutoNation and Sonic Automotive. Each company has relatively high variable debt balances, primarily due to floor-plan financing. When rates rise, interest costs go up accordingly. Langan says the best plays in the space are ones with attractive valuations such as General Motors, Adient, Ford, BorgWarner and Tenneco. 

Source: UBS
Source: UBS

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