Investing in the auto industry is not easy. Slow growth, technological disruption (such as in the electric vehicle sector) consumes capital, overcapacity in the industry, and thin profit margins have plagued this sector year after year.

Additionally, there are sporadic issues. For example, excessive inventory caused Stellantis (STLA.N) to see a significant decline in profits in 2024, in stark contrast to its record performance in 2023. CEO Carlos Tavares lost his position as a result, and the company's stock price fell 44%.

Stellantis is just the tip of the iceberg. In the past five years, the largest 25 auto stocks in the Russell 3000 index have averaged about a 5% decline per year, with an average PE of less than 10 times.

Tesla (TSLA.O) is an exception, which leaves traditional value-oriented auto investors confused. Tesla stocks have averaged an annual ROI of about 64%, but with a PE ratio of approximately 122 times the estimated earnings for 2025. Auto investors find it hard to accept such high valuations.

The current outlook is also not optimistic. Bernstein Analyst Daniel Roeska noted in a recent report, "This year will be difficult." He expects stable demand to be a positive signal, but the concerns of falling prices, weak electric vehicle profitability, and the need to manage increased inventory through production cuts are worrying.

Roeska's average Buy rating ratio for Ford Motor (F.N) and General Motors (GM.N) is approximately 37%, while the average Buy rating ratio for S&P 500 constituents is 55%.

Analyst sentiment is low not only among traditional auto manufacturers. The average Buy rating ratio for the 25 auto stocks in the Russell index is only 40%.

Nevertheless, completely avoiding this Industry may result in missing out on good opportunities. In 2024, the ROI for Tesla Stocks is about 63%, while the ROI for General Motors Stocks is approximately 50%.

In low-growth cyclical Industries, investors need to Buy at lows and Sell at highs. One strategy is to choose stocks that have seen an improvement in Analyst Ratings. For example, in 2024, holding Auto Stocks that receive multiple rating upgrades throughout the year could yield an ROI of around 20% for investors.

So how can stocks that are about to be upgraded be found? Although there is no perfect method, attention can be paid to those stocks that have recently received several rating upgrades, or where Analyst sentiment seems to have bottomed out.

According to this standard, the best Auto Stocks for 2025 may include Tesla, Ford Motor, BorgWarner (BWA.N), and Dana (DAN.N).

The Analyst sentiment for Tesla, BorgWarner, and Dana is improving.

Tesla's improvement is driven by plans for autonomous vehicles and new models. Elon Musk's automotive company plans to launch a lower-priced electric vehicle model at the beginning of 2025 and start an autonomous taxi service by the end of the year. If these plans proceed on schedule, they will lead to faster growth, higher earnings, and more rating upgrades.

Dana manufactures axles, drive shafts, and other components for Autos, trucks, and heavy-duty equipment. The company announced it will sell its "non-highway business" in November 2024, which accounts for about 30% of total sales. Consequently, Analysts' optimistic sentiment regarding its stock has increased.

BorgWarner is favored due to low valuation and strong Business execution. JPMorgan Analyst Ryan Brinkman pointed out that BorgWarner produces parts for both electric vehicles and traditional Autos, allowing the company to benefit regardless of the type of vehicle consumers purchase. He dubbed it the preferred Auto Parts stock for 2025, providing a Target Price of $51. In contrast, BorgWarner's current stock price is $31.54, with a PE ratio of less than 7 times the expected earnings in 2025, down from 8 times a year ago.

The analyst sentiment for Ford has not yet improved, but it may have reached a bottom. Only 27% of Analyst Ratings are 'Buy', down from 45% a year ago. If the company can improve the billions in operating profit losses caused by quality issues in 2024, the stock price may rise.

For investors in Auto Stocks, waiting for the perfect timing may result in missing good opportunities. It is better to look for Stocks that can succeed regardless of market conditions.

As usual, stock screening is just the starting point. After identifying potential investment opportunities, the harder work is understanding the various factors that affect each stock.