Why SunTrust Says to Buy Automobile-Related Chip Stocks for 2016

Sensata Technologies

This top stock is down a stunning 20% since the first of the year. Sensata Technologies Holding N.V. (NYSE: ST) is one of the world’s leading suppliers of sensing, electrical protection, control and power management solutions with operations and business centers in 16 countries. Sensata makes products that improve safety, efficiency and comfort for millions of people every day in automotive, appliance, aircraft, industrial, military, heavy vehicle, heating, air-conditioning and ventilation, data, telecommunications, recreational vehicle and marine applications.

Some analysts estimate the Volkswagen accounts for 5% to 7% of sales to the company, primarily from Europe and China where the company sells predominantly gasoline-based cars. The VW issues are primarily in diesel engine vehicles. While there could be a near-term lower demand from VW, the analysts remain positive long term on the company and believe Sensata remains well positioned to take advantage for content growth and should see leverage as mergers and acquisitions related costs come out.

The consensus price objective is $52. The stock closed trading on Wednesday at $37.03, up over 6% on the day.

TE Connectivity

This stock is down a whopping 15% in the past two weeks. TE Connectivity Ltd. (NYSE: TEL) designs and manufactures products at the heart of electronic connections for the world’s leading industries, including automotive, energy and industrial, broadband communications, consumer devices, health care, and aerospace and defense. TE has a long-standing commitment to innovation and engineering excellence, which helps its customers solve the need for more energy efficiency, always-on communications and ever-increasing productivity demands.

Many on Wall Street are bullish on the stock due to the increasing electronic content in automotive, industrial, consumer and defense industries. Analysts cite the stock’s very reasonable valuation and the high growth auto sensor business helping to ramp up sales and earnings. While the company has a more modest exposure to Cisco in its communication segment, revenues did grow by 8% year over year.

While VW accounts for about 5% of total sales, most on Wall Street think there will be little if any meaningful material impact as the company has such broad overall market exposure. TE is well positioned long term to take advantage of content growth in the automotive market. Another positive is the $3 billion in share buybacks outstanding, which is expected to be completed this year.

TE investors receive a 2.35% dividend. The consensus price target is $74.55. The stock closed Wednesday at $56.30.

While auto sales may not continue at 2015’s blistering pace, it’s a good bet they stay strong, with the low rates and even cheaper gasoline than last year. All these companies make good sense for aggressive growth accounts.