Time to Trade In?

American families own more four-wheel-drive trucks than the Army–but unlike the Department of Defense, we stop buying at some point. Like now. After years of acceleration, sales of sport-utility vehicles, or SUVs, are slowing–and the turn surely signals tougher times ahead for U.S. carmakers. How soon? That’s the key question. Overall, car sales are strong, and SUV sales remain fairly brisk. Just last week Ford reported record quarterly earnings (adjusted for one-time events).

So don’t expect a sudden disaster. But if you’re looking for a navigation system for the industry, this is it: SUVs are the most profitable things on wheels, and as their growth curve turns down, so will profits–and car stocks.

For consumers the news couldn’t be better. Carmakers tooled up for exponential SUV demand, and now find themselves so overstocked that they’re laying on goodies to keep moving the metal. GM, which a few years ago sold virtually every Suburban at list price, has incentives on its Suburban, Yukon and Tahoe lines. Ford is offering low-rate financing on the Explorer, and DaimlerChrysler has lowered lease prices on its Jeep Grand Cherokee and is cutting production.

Before you dash off to the nearest dealer, though, check the auto exposure in your mutual funds and stock portfolio. You may be able to cut your best deal right at home–by cutting your auto holdings. The stocks have had a nice run. They’re up 65% in the past two years, vs. 47% for the Standard & Poor’s 500. Since the last recession, in 1991, they’re up 365%, vs. 237% for the S&P 500.

The toughest thing to do with a stock that’s been good to you is sell and pay the tax. But unless you’re a lifer, now is the time to lighten up. Already car stocks have begun to erode, slipping 16% in the past two months–amid glowing results. The market is telling us something.

Here’s my view: the auto cycle is nearing an end. SUV sales in the first half of the year were up 11.2%, vs. an increase of 18.4% in the first half of 1998, reports a research firm, Autodata. If the trend holds, this will mark the slowest growth for SUVs in years. That puts profits under pressure because it takes three sedans to generate the profit of one SUV.

Even in the diverse global economy of today, the car business is cyclical. At the moment we’re in a boom. The trick is to sell before the bust. “The time to buy auto stocks is when times are bad but not getting worse,” notes Merrill Lynch analyst John Casesa. “The time to sell is when times are good but not getting better.” Billionaire Kirk Kerkorian showed us the way. He was buying Chrysler at $10 in 1991, when the company was on its back. His $1.5 billion investment is worth more than $5 billion–and he’s now a seller.

Don’t want to wait for the next recession in the U.S.? Consider buying Japanese auto stocks now. The economy there is bad but not getting worse. And Toyota, Honda and Nissan are well positioned to benefit from the next hot vehicle–the car-SUV hybrid. The bell ringer in that group is the Lexus RX300, which has seen sales explode 150% this year. It’s built on a car frame, not a truck frame, yet sits above traffic, satisfying the No. 1 reason consumers give for buying an SUV. Swapping U.S. for Japanese car stocks isn’t unpatriotic. It’s the smart way to take chips off the table and stay invested in autos.

See time.com for more on automakers. Dan appears on CNNfn Tuesday at 12:45 p.m. E.T. and on BNN radio Monday at 5:40 p.m. E.T.