A handful of stocks are set to outperform as they take advantage of four key trends transforming an automotive industry that is going to look a lot different than it does today in another decade. “The automotive industry will change dramatically over the next five or 10 years,” Wolfe Research’s Rod Lache told Barron’s, as he and his colleague Dan Galves pointed to General Motors, Tesla, Lear, BorgWarner and Aptiv, as five stocks that will be boosted by what they call the ACES megatrends—Autonomous, Connected, Electric, and Shared—driving the changes in the automotive industry.

5 Stocks That May Win the Auto Race

  • General Motors Co. (GM)
  • Tesla Inc. (TSLA)
  • Lear Corp. (LEA)
  • BorgWarner Inc. (BWA)
  • Aptiv PLC (APTV)

Source: Rod Lache & Dan Galves; Barron’s

“First, we look for companies poised for extraordinary growth. Second, we seek those that are resilient because of exposure to a customer or technology that’s doing well, a strong order backlog, or very low operating leverage. Third are companies that can create value through spinoffs. Fourth are those with extraordinary free cash flow,” said Lache.

4 Transport Mega Trends

  • Autonomous
  • Connected
  • Electric
  • Shared

What It Means for Investors

The future of the automotive industry is one where vehicles are increasingly driverless, increasingly connected to mobile communication services, increasingly less dependent on fossil fuels, and increasingly shared among more of the population. Those changes will disrupt the auto market as it exists today, but will also bring enormous opportunities.

In just six years, Lache expects the currently $6 billion global market for autonomous driving technologies to grow to $50 billion. Although hybrid vehicles comprised just 3% of total global light-vehicle production last year, Lache forecasts they’ll be as much as 24% within five years, according to Barron’s.

General Motors’ 75% stake in Cruise Automation, one of the leaders in artificial-intelligence (AI) technology for autonomous vehicles, will help the traditional automaker benefit from the recent trend. On top of that, the company has robust free cash flow that is likely to hold up even in a downturn.

Lache and Galves also like Tesla despite the electric carmaker’s profitability and production issues in the past. They believe the company is currently generating enough revenues to self-fund around 30% of capacity growth over the next five years. The opening of a factory in China later this year will also be a key catalyst for the stock.

BorgWarner, Lear, and Aptiv are all key suppliers of various components for hybrid or fully electric vehicles and for the electric architecture needed in the "smartification" of automobiles.

Looking Ahead

The problem with trying to predict winners in a market that is undergoing rapid change is that there are so many unknown variables for which to account. Regulation could pose a hurdle for the adoption of fully autonomous vehicles, while other trends outside the automotive industry, such as a rise in people working remotely, could depress the overall demand for automobile transportation. Further, change can often remove previous barriers to entry, allowing newcomer firms to disrupt the market’s incumbent leaders.