Traffic warning: There’s a heavy traffic jam of car stocks on the freeway Wednesday afternoon, red lights as far as the eye can see – and auto stock investors should probably expect delays before their stock prices do not recover.
As of 1 p.m. ET, shares of Ford Motor Company (F -5.58%) are down 4.1%, and its big rival General Engines (GM -6.29%) is down 4.8%. Meanwhile, Avis Budget Group (AUTO -11.37%)the car rental company and sometimes used car seller, is half as successful as the automakers that sell its cars to it, down 10% on the nose.
You can probably thank Europe for much of this mess.
Admittedly, the whole sad stock market seems to be in the red this afternoon, with the Dow Jones down 2.5% and the S&P 500 overall, the situation is even worse – down 2.9%. Several retailers (albeit in unrelated sectors) reporting significant earnings underperformance due in large part to high transportation costs, supply chain issues and inflation are likely part of the problem. It makes sense that if these issues plague one business, other businesses are likely to be affected as well.
Inflation in particular worries automakers, as an 8% increase in the price of an automobile to $46,000 will obviously have a bigger effect on sales than an 8% increase in the price of a tube of toothpaste. at $2. Rising interest rates – designed to lower inflation – are also a concern, because 85% of new cars in the United States are bought on credit, and the price of that credit is rising.
And indeed, an early European report suggests we may already be seeing this effect. According to the European Automobile Manufacturers Association (EAMA), April new car registrations in Europe fell 20.6% year-on-year. This “car-specific” data may explain why car stocks are in worse shape than most today.
Admittedly, EAMA mainly pointed the finger at supply chain issues, saying they were the main cause of the drop. But even so, you have to understand that inflation and rising interest rates have also played a part – or perhaps worse, if they are not still play a role, they will soon, and the numbers will get even worse!
Considering further that the 684,506 car registrations reported by EAMA was the lowest number ever reported since the agency’s inception account new car registrations bodes pretty badly for the auto industry, I must say. Yet this is the price to pay for investing in cyclical industries after years of rising sales; they eventually come back down.
But… then they go up! If you are a long-term investor and believe that the ever-repeating cycle will continue, then I have to say: buy Ford stock today for less than five times trailing earnings, buy GM for less than 6 .5 times earnings, and yes, even buying Avis Budget at a paltry 6.6 times earnings could be a great way to play the eventual return of the cycle recovery.