Auto stocks tumble, but technician says one has breakout potential

Auto stocks have hit the skids.

Over the past three months, trade worries and weak sales drove General Motors, Ford, Fiat Chrysler and Toyota to their lowest level of the year. Disappointing declines in monthly car sales for GM and Ford added to the industry's pain on Tuesday.

Technician Frank Cappelleri is steering clear of all but one auto stock.

"I wouldn't call any of them technically attractive right now, but if I had to pick one, it'd be Toyota," Instinet's chief market technician said Tuesday on CNBC's "Trading Nation."

Since its lows in December 2009, Toyota has rallied nearly 130 percent. Its performance in recent years could have set it up for a larger rise.

"Over the last five years, it's about flat, but it hasn't broken down yet and that's interesting because it's built this constructive pattern along the way," said Cappelleri. "I'd be patient but I wouldn't mind buying this breakout to $140 if it gets there."

Toyota briefly traded at $140 at the beginning of the year, 11 percent higher than Tuesday's close of $125.71.

Chad Morganlander, portfolio manager at Washington Crossing Advisors, is concerned the broader auto space could lure investors into a value trap.

"We would be cautious on the autos," Morganlander said on "Trading Nation" on Tuesday. "They look cheap from a P-E perspective, but when you include debt on the valuation, then they're not cheap."

Ford, for example, trades with a price-to-earnings ratio below 7, more than half the multiple on the S&P 500. However, it ended the second quarter with $102 billion in long-term debt and $221.5 billion in total liabilities. Morganlander says GM has a similar setup.

"When you're looking now at this stage in the market cycle you want to find companies that have good quality, consistent earnings growth," he said. "If you want industrials and you need that cyclical torque in your portfolio, look at 3M, look at Stanley, Black & Decker, but avoid companies that have a lot of debt on their balance sheets."

By comparison to Ford's $102 billion, 3M had $11.3 billion in long-term debt on its balance sheet at the end of its June quarter, while Stanley, Black & Decker held $2.8 billion.

Disclosure: Washington Crossing Advisors has holdings in 3M and SWK.

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Trading Nation is a multimedia financial news program that shows investors and traders how to use the news of the day to their advantage. This is where experts from across the financial world – including macro strategists, technical analysts, stock-pickers, and traders who specialize in options, currencies, and fixed income – come together to find the best ways to capitalize on recent developments in the market. Trading Nation: Where headlines become opportunities.

Michael Santoli

Michael Santoli joined CNBC in October 2015 as a Senior Markets Commentator, based at the network's Global Headquarters in Englewood Cliffs, N.J.  Santoli brings his extensive markets expertise to CNBC's Business Day programming, with a regular appearance on CNBC's “Closing Bell (M-F, 3PM-5PM ET).   In addition, he contributes to CNBCand CNBC PRO, writing regular articles and creating original digital videos.

Previously, Santoli was a Senior Columnist at Yahoo Finance, where he wrote analysis and commentary on the stock market, corporate news and the economy. He also appeared on Yahoo Finance video programs, where he offered insights on the most important business stories of the day, and was a regular contributor to CNBC and other networks.

Follow Michael Santoli on Twitter @michaelsantoli

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