3 Foreign Auto Stocks to Buy Despite Industry Challenges

The outlook for the Zacks Foreign Auto Industry remains cautious despite pockets of demand resilience across key markets. China, the industry’s largest growth engine, is likely to see slower momentum in 2026 as policy support for new energy vehicles fades and fragile consumer confidence weighs on demand. Europe may deliver modest volume growth, but a shift toward mass-market and EV models, along with restructuring costs, is expected to keep margins under pressure. Japan’s recovery is steady but uneven, with higher vehicle prices limiting a full return to pre-pandemic sales despite hybrid-led support. While India remains a relatively bright spot on policy-driven affordability gains, broader profitability concerns and intensifying competition temper the overall industry outlook.

Given these dynamics, a few stocks like XPeng Inc. XPEV, Nissan Motor NSANY and Mazda Motor MZDAY are still worth considering given their strategic initiatives.

Industry Overview

Companies in the Zacks Automotive – Foreign industry are involved in designing, manufacturing and selling vehicles, components, as well as production systems. The foreign automotive industry is highly dependent on business cycles and economic conditions. China, Japan, Germany and India are some of the key foreign automotive manufacturing countries. The widespread usage of technology is resulting in the fundamental restructuring of the market. Stricter emission and fuel-economy targets and ramp-up of charging infrastructure are boosting sales of green vehicles. With firms intensifying their electrification game, competition is getting tougher with each passing day. Foreign automakers are now actively engaged in the R&D of electric and autonomous vehicles, fuel efficiency and low-emission technologies.

Factors to Shape the Industry's Fate

China Auto Momentum to Ease: China’s auto market reached record levels in 2025, with vehicle sales and production surpassing 30 million units for the third consecutive year, driven largely by strong demand for new energy vehicles. However, growth is expected to moderate in 2026 after the robust performance in 2025 absorbed much of the pent-up demand. Domestic demand conditions remain fragile, as concerns around income visibility and job security continue to weigh on consumer confidence. In addition, policy support for NEVs is being gradually scaled back, with partial purchase tax exemptions replacing full relief and trade-in subsidies being phased out. As the market shifts from policy-led to demand-driven growth, NEV sales momentum is likely to slow.

Europe Eyes Volume Growth But Weak Margins Concern: European auto sales posted modest growth of about 2.5% in 2025, signaling early stabilization after a volatile period. Per Fitch Ratings, the momentum is expected to continue in 2026, supported by the rollout of new mass-market vehicle launches and ongoing regulatory incentives that encourage EV adoption. However, the sales recovery is unlikely to translate into a meaningful improvement in profitability. Demand is shifting further toward mass-market and EV models, both of which typically carry lower margins. At the same time, intensifying competition and ongoing restructuring efforts are expected to keep profitability under pressure. While restructuring charges may ease compared with 2025, continued footprint and workforce optimization will still be concerning.

Hybrids to Anchor Japan’s Auto Market Sales: Japan’s auto market showed steady improvement in 2025, with vehicle sales rising about 3.3%. The production outlook for 2026 has improved per S&P Global, supported by tax reductions, the removal of the environmental performance tax, and the reallocation of Mazda CX-30 production back to Japan. Recovering consumer confidence and the possibility of further tax relief should support demand in 2026, although sales are still expected to remain below pre-pandemic levels due to higher vehicle prices. The market continues to shift toward electrification, with hybrid vehicles remaining dominant. At the same time, BEV adoption is gradually increasing, driven by new model launches and intensifying competition across electrified segments.

Policy Support Powers India Auto Growth: India’s auto market delivered growth in 2025, with vehicle sales rising about 5%, supported by government-led tax cuts that improved affordability across key segments. The reduction in taxes on larger SUVs and small cars helped lower ownership costs, driving stronger demand, particularly among the expanding middle class. As a result, mass-market vehicles continue to anchor volume growth. Alongside this, India’s push toward electric mobility is steadily reshaping the automotive landscape, with rising adoption supported by policy incentives and new model launches. Looking ahead, industry sentiment remains constructive, as favorable policy measures, improving affordability and evolving consumer preferences are expected to sustain demand momentum.

Zacks Industry Rank is Discouraging

The Zacks Automotive – Foreign industry within the broader Zacks Auto-Tires-Trucks sector currently carries a Zacks Industry Rank #184, which places it in the bottom 25% of around 245 Zacks industries.

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates dull near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1. The industry’s positioning in the bottom 50% of the Zacks-ranked industries is a result of a negative earnings outlook for the constituent companies in aggregate. Over the past year, the industry’s earnings estimates for 2026 have moved 62.6% south.

Still, we will present a few stocks that are worth adding to your portfolio. But before that, let’s look at the industry’s recent stock market performance and current valuation.

Industry Lags Sector and S&P 500

The Zacks Automotive – Foreign industry has underperformed the Auto, Tires and Truck sector and the Zacks S&P 500 composite over the past year. The industry has risen 11% compared with the S&P 500 and the sector’s growth of roughly 16% and 14%, respectively.

One-Year Price Performance

Industry's Current Valuation

Since automotive companies are debt-laden, it makes sense to value them based on the EV/EBITDA (Enterprise Value/ Earnings before Interest, Tax Depreciation and Amortization) ratio.

Based on the trailing 12-month enterprise value to EBITDA (EV/EBITDA), the industry is currently trading at 10.48X compared with the S&P 500’s 18.90X and the sector’s 27.29X.

Over the past five years, the industry has traded as high as 12.48X, as low as 6.97X and at a median of 9.24X, as the chart below shows.

EV/EBITDA Ratio (Past Five Years)

3 Stocks to Buy

XPeng: It continues to emerge as one of China’s fastest-growing electric vehicle makers, strengthening its position in an intensely competitive market through strong sales momentum and a broad product portfolio. In 2025, vehicle deliveries surged 126% year over year to 429,445 units, reflecting rising consumer acceptance across multiple segments. The company’s lineup spans sedans, SUVs, and multi-purpose vehicles, including the P7i sedan, G6 coupe-style SUV, G9, and the seven-seat X9 MPV. XPeng has also expanded its appeal to value-focused buyers with the MONA M03, while models such as the P7+ and the new G7 crossover target family-oriented customers.

International expansion is gaining traction, with overseas deliveries rising 96% in 2025 as XPeng entered 60 countries and regions. Its technology leadership, supported by AI-driven smart driving systems and advanced software, further differentiates the brand. Beyond vehicles, XPeng is investing in future technologies like flying cars and humanoid robots, underscoring its ambitions to redefine mobility.

XPeng currently carries a Zacks Rank #2 (Buy). The Zacks Consensus Estimate for XPEV’s 2026 sales and bottom line implies year-over-year improvement of 35% and 170%, respectively. The consensus mark for 2026 EPS has moved up by 14 cents in the past 90 days. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Price & Consensus: XPEV

Nissan: It remains one of Japan’s leading automakers and is undergoing a meaningful reset under its “The Arc” strategy. The company has launched an aggressive cost-cutting plan aimed at simplifying operations and improving efficiency, with targeted savings of up to ¥500 billion by fiscal 2026. These efforts include factory closures, labor cost reductions and production restructuring to create a leaner and more resilient business. Management expects these actions to support positive auto operating profit and free cash flow by fiscal 2026.

On the product side, Nissan is accelerating its electrification push. Recent launches include the sixth-generation Micra EV for Europe and the third-generation LEAF. A long-term battery supply deal with SK On further strengthens its EV roadmap, supporting upcoming launches and range improvements. Beyond EVs, Nissan is investing in advanced technology, highlighted by its next-generation ProPILOT system and plans for an autonomous ride-share service in Japan by 2027.

Nissan currently carries a Zacks Rank #2. The Zacks Consensus Estimate for NSANY’s fiscal 2027 sales and bottom line implies a year-over-year improvement of 1% and 127%, respectively. The consensus mark for next fiscal year’s EPS has moved up by 4 cents in the past 90 days.

Price & Consensus: NSANY

Mazda: This Japanese automaker continues to leverage its strong brand and reputation for high-quality vehicles as it works to steadily improve profitability through a more disciplined product mix and strategy execution. The company has opted to slow its electric vehicle rollout, with its next major EV now expected closer to 2029, reflecting a reassessment of market demand, policy support, and charging infrastructure readiness. Rather than stepping back from electrification, Mazda is shifting greater focus toward hybrids, which remain popular among consumers seeking better fuel efficiency without full reliance on charging networks.

Mazda is developing an in-house hybrid system, expected to debut on a high-volume model around the 2027 model year, while expanding its lineup of hybrid and plug-in hybrid vehicles such as the CX-50 Hybrid, CX-70 PHEV and CX-90 PHEV. This approach aligns with Mazda’s multi-solution strategy, balancing emissions reduction with evolving customer preferences.

Mazda currently carries a Zacks Rank #2. The Zacks Consensus Estimate for MZDAY’s fiscal 2027 sales and bottom line implies year-over-year improvement of 8% and 700%, respectively. The consensus mark for next fiscal year’s EPS has moved up by 3 cents in the past 60 days.

Price: MZDAY

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This article originally published on Zacks Investment Research (zacks.com).

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