The best way to make money on the stock market is to buy when other investors are fearful, so the current market conditions present some very attractive opportunities.
For those who can stomach a bit of risk and are willing to ride out the storm, there are two big buys that could pay off in a year or two — Volkswagen AG (ADR) (VLKAY) and Chipotle Mexican Grill, Inc. (CMG). Both firms have suffered highly publicized PR nightmares over the past few months which have significantly impacted their 2015 results and tarnished their reputations.
However, their depressed share prices could be a great opportunity to buy quality companies that are likely to rebound over the course of the next year.
The Case for Volkswagen Stock
Investors who went short on Volkswagen when the company’s emissions scandal broke were able to reap gains of more than 8% if they were patient and sold before the stock tanked once again at the beginning of the year.
Now, with shares down almost 40% from six months ago, many are wondering if there’s a case to be made for a long-term position in Volkswagen stock.
If you’re willing to wait it out and you can handle a bit of volatility, then the answer is yes.
Dealers Are Hurting With No Diesel
Volkswagen dealers have struggled in the U.S. — the company reported that its U.S. sales declined a staggering 14.6% in January. Almost all of the company’s models posted a decline in sales, save the automaker’s compact SUV, the Tiguan.
However, one of the biggest reasons that U.S. sales are suffering is that dealers aren’t allowed to offer Volkswagen’s popular diesel models until the Environmental Protection Agency is convinced that the faulty emissions sensors have been repaired and replaced adequately.
Diesel vehicles typically represent around 20% of VW’s U.S. sales, so their absence explains a lot of the poor sales figures.
However, once Volkswagen does sort things out with the EPA and its diesel models return to the market, it’s likely that Americans will also return to buying them. While the diesel scandal did tarnish VW’s reputation somewhat, it is doubtful that the ordeal will linger long in the public’s memory.
General Motors Company (GM) cars with faulty ignition switches were found to be the cause of fatal accidents in 2014, but it has already come out from under its own struggle to win back public favor.
The only question facing Volkswagen is, how long it will take for the company to make its diesel vehicles available once again? Last month, the company’s proposed recall plan was rejected by the California Air Resources Board, so it could take some time before next steps are in place.
In Europe, the recall process has already begun and is expected to be relatively fast and simple, but in the U.S., negotiations with the government could be lengthy.
Overdone Hype on VLKAY Fines
Another big factor weighing on Volkswagen stock is the cost of litigation and fines as the EPA investigates the emissions software.
While some estimates show that the agency’s maximum fines could put Volkswagen out of business, that is very unlikely. In fact, when the final fees are announced, VLKAY shares stand to rise considerably, as the total will probably be much lower than what the media hype has predicted. News that the company may have to pay $45 billion worth of fines brought Volkswagen shares 5% lower , but in actuality that figure is the absolute maximum and very unlikely.
Worth The Wait?
Of course, Volkswagen stock isn’t going to rebound tomorrow, or even in a month’s time. Instead it will be a waiting game to reap the rewards. But the company currently offers a dividend yield of over 4% — which probably isn’t going anywhere thanks in part to a 39% payout ratio — to make the wait a little more bearable.
Chipotle Mexican Grill, Inc.
Fast food chain Chipotle Mexican Grill is working to get back on its feet after a food-borne illness scare caused the company to revamp its food safety rules and sent patrons and investors fleeing.
CMG shares have tumbled nearly 36% over the past six months as a result, making now the perfect opportunity to buy into a company with its finger on the pulse of what Americans want.
CMG a Solid Business
Before E. coli turned Chipotle’s “food with integrity” slogan into a running joke on social media, the company’s efforts to give consumers a healthy fast-food option was really resonating. Americans have bought in to the idea that all-natural ingredients are better for them, and Chipotle found a way to offer a wide variety of GMO-free, socially responsible meals in a fast-food environment.
Chipotle’s menu allows patrons to customize their meals but doesn’t require the chain to stock a huge variety of ingredients. That means reduced costs, faster service times and higher margins.
The E.coli scare hasn’t changed the company’s business model at all — if anything, the food-borne illness ordeal has pushed the firm to set itself up in a stronger position for the next five years. With the CDC having declared an end to the E. coli outbreak, Chipotle has implemented new food-safety measures that it says will make the fast-food chain the safest place to eat.
Not only that, but the company is pushing forward with aggressive expansion plans through 2017.
This Too Shall Pass for Chipotle Stock
While worries about E.coli are still fresh in the public’s mind, Chipotle believes that the future is looking bright, and analysts agree, with Bank of America and Wells Fargo both upgrading the stock this month.
People are quick to forget, and the next big corporate failure will soon replace the hype surrounding Chipotle’s food-borne illness snafu. This month, the fast-food chain is planning to launch an extensive marketing campaign to get customers back through the doors and remind people just how much they love farm-sourced, non-GMO burritos.
To kick off the new campaign, Chipotle plans to spend six times what it spent on marketing during the first quarter last year — but many are expecting the investment to pay off.
This year will likely be a rebuilding year for the chain, but if the company is able to regain customers’ trust and maintain its position as a feel-good dining option, then by the end of the year, CMG will be back on track as a leader in the fast-food industry.
And those who bought Chipotle stock will be reaping the rewards.
As of this writing, Laura Hoy was long VLKPY.