Needless to say, this year has not been a kind one so far for the automotive sector: just ask American icon General Motors Company (NYSE:GM). Since the January opener, GM stock has given up nearly 7% in the markets. If it weren’t for a recent relief rally, the situation could have been much worse.
Perhaps the only saving grace for GM stock is that few names in the industry are doing well. Domestic rival Ford Motor Company (NYSE:F) is likewise down 7%. Toyota Motor Corp (ADR) (NYSE:TM) is performing better, but at parity for the year, it’s nothing to get excited about. With the broader market correction, automakers just haven’t gained traction.
If you’re looking to me for a contrarian argument, I’m afraid I’m not your guy. In late October of last year, I warned readers not to buy into the sudden enthusiasm at the time. I simply didn’t like the fundamentals for General Motors stock, which didn’t justify the move.
Immediately after my write-up, GM stock fell. It proceeded to trade sideways for a while before eventually succumbing to downside pressures. At this point, I’m sure discount divers are eyeing shares.
However, I urge you to avoid GM for three reasons:
Lackluster Auto Sales
Let me just state the painfully obvious: if you’re an automaker, you need car sales to rise. While they’re doing exactly that, the growth rate is extremely lethargic.
Worldwide, we saw just over 79 million cars sold in 2017. This represented a 2.3% increase in sales over the prior year. For 2018, industry experts forecast that we’ll see 81.6 million cars sold, which is just under a 3.3% lift.
I’m not going to dismiss the growth, but these pedestrian rates don’t provide much investor confidence for GM stock. Moreover, our domestic auto market has largely stagnated since late 2015. That’s a problem for GM considering that you absolutely have to sell well in the U.S. Let’s be real: the company is not going to sell in Japan.
And while China is a massive automotive market, as I stated in my last write-up, it’s not a consistent one. Plus, we don’t exactly have friendly relations with China right now. If President Trump wants to continue playing geopolitical hardball, this might further pressure GM stock.
Disastrous Autonomous Driving Controversies
I’m impressed with how quickly Tesla Inc (NASDAQ:TSLA) recovered from its autonomous driving controversy. As you undoubtedly know, a fatal crash involving the company’s Autopilot feature sank Tesla stock. Autopilot is pivotal to Tesla cars’ success, so the fallout was not surprising.
However, this driverless technology fiasco has negatively impacted the entire auto sector. In order to catch up to industry trends, automakers are developing their own technologies. GM spent $8.1 billion in research and development last year, one of the highest expenditures in the world.
But with AI getting a black eye, much of that R&D is a waste. Back in October of 2017, a survey revealed that fewer than half of respondents would ride in a driverless vehicle. I’m absolutely certain that metric has fallen dramatically now.
It doesn’t matter that statistically, AI drivers cause fewer fatalities than human drivers over the same miles driven. Consumers perceive the technology to have failed dramatically, which will hurt GM stock.
GM Stock Is Technically Weak
Ultimately, I can throw as many facts and figures as I can find, but what matters most is investor sentiment. If people believe that they can extract profits from GM stock, shares will likely rise. However, that’s not what’s happening here.
The most obvious concern is the bulls’ inability to regain control of GM since mid-January of this year. But a more pressing issue is its 200 day moving average. This commonly-cited indicator essentially parallels a rising support line anchored since summer 2016. The issue is that the current price action trades below the 200 DMA.
If General Motors stock doesn’t rise above this indicator soon, I think the bears will taste blood. The overall market is unfavorable for legacy consumer-centric companies. Additionally, any degradation in our relationship with China impedes on GM’s critical market. Combine this with industry specific challenges, and you have an unusually risky investment.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.