Morgan Stanley's Adam Jonas shares his auto and EV stock picks for 2022

Published Tue, Dec 14 20216:47 AM EST

Morgan Stanley's Adam Jonas said investors should brace themselves for volatility in the automotive sector next year and named several stock picks to ride out the action. "We look ahead to FY22 with expectations of strong automotive profitability, but increasingly difficult comps and potential narrative changes that may challenge conventional expectations about the EV strategy. If you must own stocks in this industry, please be very selective," Jonas said in a note Monday. Jonas expects demand for autos to exceed production capacities for both electric and traditional internal combustion engine vehicles in 2022, after this year when supply constraints have sent auto prices soaring. "However, we think the market's greater wisdom will look through these short term forces, leaving a challenging outlook for the stocks," Jonas said. "We'd keep AAA and roadside assistance on speed-dial for the bumpy road ahead." Jonas predicts 2022 will see higher production levels, flat or lower prices, persistent raw material and labor inflation, more share issuances and EV carve-outs, fewer special purpose acquisition companies and greater shareholder activism. "We expect FY22 to feature a lot of 'travel' on the road but believe investors will need to put in an extraordinary amount of work, stomaching an elevated amount of volatility, to help scrape together what we see as largely 'sideways' returns," Jonas said. The electric vehicle outlook On the EV front, Jonas estimates worldwide EV sales will reach 7.6 million units in 2022 and global EV penetration will be at 9.2% next year versus 6.6% in 2021. The analyst's stock picks for 2022 include newly public EV start-up Rivian , EV incumbent Tesla and legacy name General Motors . Jonas last week named Rivian "the one" that can challenge Tesla , highlighting Amazon's stake in Rivian. The company started trading publicly in November. "Rivian's compelling product, strong management, and deterministic access to capital are underpinned by a strategic relationship with AMZN to decarbonize the final mile," Jonas said. The Morgan Stanley analyst is also bullish on Tesla, calling it "the leader in EV manufacturing, batteries and autonomy." Jonas believes Tesla's software business is a high-margin segment that could boost growth for the company. GM is Jonas' current top pick in the auto space, he said. The analyst likes GM's diversified portfolio, strong cash flow, robust balance sheet and North American profit margins. Tesla and GM are both beating the market this year, up 37% and 42%, respectively versus the S & P 500's 24% gain. Meanwhile, Rivian is up 52% from its IPO price and 11% from its opening price. —CNBC's Michael Bloom contributed reporting.

The logo marks the showroom and service center for the US automotive and energy company Tesla in Amsterdam on October 23, 2019.

John Thys | AFP | Getty Images

Morgan Stanley's Adam Jonas said investors should brace themselves for volatility in the automotive sector next year and named several stock picks to ride out the action.