As General Motors prepares for its initial public offering
((IPO)), scheduled for today, now may actually be the proper time
to get out of investments in the automobile sector - before they
drive off a cliff.
Since the March 2009 low in global indexes, automotive stocks
have greatly outperformed the broader markets. After all, since the
automotive industry is highly cyclical and tends to underperform in
recessions and outperform in recoveries, it is understandable how
the struggling automotive companies were able to bounce back so
vigorously as automobile demand returned. But with GM, Ford (
), and the rest of the automotive industry attracting so much media
and investor attention lately, along with the uncertainty over
slowing global growth and already-inflated automotive stock prices,
is it time to rethink investing in companies such as Ford, which is
up over 1500 percent in less than 2 years?
Take a look at the following chart:
click to enlarge
Not only are automotive stocks outperforming the rest of the market
by 25 percent since March 2009, but the divergence between the two
is wider than at any time since late 2007 - right at the peak
before the recession. It seems these wide divergences between the
automotive industry and the overall market signal short-term
pullbacks, if not long-term peaks.
The questions remain:
Is the automotive industry growth sustainable? And what
does it rely on?
First off, we have to remember that GM and Chrysler both went
bankrupt in 2009 with Ford not far behind. Jobs were lost, the
industry essentially collapsed, and people's investments were wiped
out; GM and Chrysler were worthless, and Ford was now worth $1.01 a
share (down from over $27 ten years prior and down from nearly $9
less than a year earlier). In other words, the US auto industry
failed to compete with the rest of the world, failed to innovate
its cars to keep up with consumer demand, and failed to protect its
employees and shareholders. And yet, less than two years later,
investors are clamoring and fighting over who gets to buy GM again.
They screwed us over and now we want round two?
GM's return to the stock market is somewhat acceptable. It has
returned to profitability; and, after a heavy dose of government
help, it can attempt to recapture its place within the US auto
industry and further expand into growing global markets. The
problem, however, is that GM's IPO may be coming out exactly at the
top, as the momentum that has carried the automotive industry and
the overall global economies may be running out of steam (or
3 Reasons to AVOID Auto Stocks (especially GM and
Massive Price Run-ups.
Not only is the automotive industry up over 100 percent as a whole
(as shown above), but Ford - which probably best represents the US
auto industry - is up over 1500 percent in that same time.
Take a look at the chart:
Ford has not only made an almost unheard-of parabolic move up, but
it has done so in less than two years - that's 750 percent a year.
Add to that an almost vertical run-up in price since September and
the fact that industry-leading companies (as Ford is in the US auto
industry) rarely, if ever, see such huge moves up in such a short
span of time- and we have huge potential for the auto industry to
Buy the Rumor, Sell the News.
With the vast media coverage and investor enthusiasm since GM's IPO
announcement in August, all the positives may be priced in already.
Ford alone is up over 50 percent since then. And with all the hype
surrounding the IPO, together with GM's announcement that it was
raising the IPO price significantly, it is hard to see GM or the
other auto company stocks rallying much further before correcting
to reasonable levels. If selling at the peak of investor excitement
is the right move (which it is), then now is a better time than
Heavily Dependent on Global Growth.
The automotive industry has sprung back from the depths of the
recession and investors are predicting tremendous upcoming growth.
But most of the excitement surrounding the auto industry's future
prospects relies heavily on increased global sales. And since the
auto industry is a heavily cyclical industry that performs in
correlation to the overall market, it is completely up to the
global recovery whether or not the auto industry will continue on
its current path. With global growth easing, European economic
troubles, and China's potential slowdown, it is not hard to see how
the auto industry's recovery could be derailed. And if it is
derailed, you can expect auto stocks to suffer.
3 Ways to Play This:
Sell Ford, Buy Toyota (
With Ford stock price running up so much in the last 2 years, it's
getting a little dangerous here. GM's IPO has made Ford price run
up even higher because of all of the excitement surrounding US
automakers. But investors seem to have forgotten about Toyota.
Take a look at the chart:
Comparing Ford, Toyota, and the S&P 500, we can see that while
Ford is up about 90 percent in the past year, and the S&P gain
struggling between 5 and 10 percent, Toyota is even further behind.
After falling to -15 percent twice, and recently breaking out to
new higher levels, Toyota may be ripe for a rally. And even if it
doesn't rally, it could outperform Ford if the automotive industry
sees a slowdown or if Ford sees a correction. In other words, this
huge 90 percent gap in performance between Ford and Toyota should
be closing soon; either Ford will move down to meet Toyota, or
Toyota will catch up to Ford as its growth slows. Either way,
selling short Ford and buying Toyota for protection could work out
While excitement has sent auto stocks soaring, steel stocks are
severely lagging behind. Since steel is used in automotives, we
could expect steel companies to see bigger profits if the auto
industry continues to grow. That said, buying steel stocks would be
profitable if the auto industry continues its growth. On the other
hand, if the auto industry struggles, we could expect steel stocks
to outperform auto stocks such as Ford.
Take a look at the following chart:
Comparing Ford to steel stocks such as US Steel (
), Nucor (
), and AK Steel (
) or the Steel ETF (SLX), we can see the wide disparity in percent
moves between Ford and the steel companies in the past 2 years. If
Ford starts to struggle, it will fall faster than the steel
companies and steel will outperform. If Ford continues to rally,
steel companies should begin to close the huge gap. Either way, it
looks as if steel is the winner here, or at least protection.
Ford, GM, and others could continue to rise, but the potential drop
after such a rally may make the risk larger than the potential
reward. Therefore, if selling Ford and buying Toyota or steel
companies seems too risky, it may be smarter to just stay out of
the auto trade until the GM IPO settles and some more clarity
enters the market.
Awaiting Ford Shorts
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