In 2008, the U.S. auto manufacturers almost imploded during from the greatest financial debacle of modern history. This time, however, the novel coronavirus crisis is raising fears of a repeat scenario. This won’t be the case because the problems are not the same. But at these current levels on Wall Street, car stock stocks deserve some attention.
There is nothing wrong with these companies, but the problem is that people are not allowed to leave their houses — let alone shop for new vehicles. Furthermore, more than 10 million Americans filed for new jobless claims in the last few weeks. And in turn, the appetite for new vehicles is going to fall off of cliff.
The difference this time compared to the last crisis, however, is a self-imposed moratorium on work. The restart of this will be a binary event where we are given the green light to work again. It won’t be an instantaneous spike but the recovery ramp will be steep.
The goal today is not to find the perfect bottom, but to evaluate the downside risk. The upside potential is easy to see since these three car stocks are down at least 50% from their highs. The tricky part, though, is to determine if they have hit a bottom. That said, the three car stocks to buy are:
That said, let’s dive in.
Car Stocks to Buy: General Motors (GM)
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After the 2008 crisis, General Motors did get bailed out. For a while it earned the nickname “Government Motors,” but eventually re-emerged a much stronger company. However, it is hard to make that argument by looking at its stock chart.
Since January, GM stock collapsed into new lows. So the easy thesis here is to buy into it 50% cheaper than the re-IPO levels. This alone is not a guarantee that it won’t fall further because the stock markets are still struggling to base. But if it were an easy be,t then everyone would be in it. This is a pure bet on that this disruption shall reverse relatively quickly.
Recoveries are rarely easy to pin point, so great trades are rarely easy to spot. The beginning stages of their development are most often camouflaged by fear. The world is once again in panic mode, and most investors are hiding when they should be looking for longer-term opportunities. Some of these may even pay quickly like what happened with Boeing (NYSE:BA), as it rallied 110% off its $90 crash in hours.
Car stocks almost went to zero last time, but the United States government has learned its Lehman lesson will not allow its two major auto manufacturer to collapse. Too many jobs are on the line, and of course pride is a big determining factor.
Short term, GM stock needs to hold $17.25 or else the chances of breaking out of this nasty descending wedge will become a much harder task. Of the three companies here, GM stock best fits investors with moderate risk tolerance who cannot stand the uncertainty of Tesla stock.
Tesla (TSLA)
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Last week, Tesla stock showed tremendous strength on a surprise headline that they beat delivery expectations. These were on lower targets, but nevertheless this is a test like no other. So any success deserves respect.
Moreover, Tesla is not a stranger to jaw dropping stock action like in early February when it spiked almost to $970 in a massive short squeeze. This was fueled by an explosion of love on Wall Street just after an extreme level of hate.
By this time last year, TSLA stock fell to $180 per share. And while CEO Elon Musk was busy ranting on Twitter and smoking pot on a podcast, there weren’t many pundits touting the stock as a valid investment. But now that’s change, and once more Elon Musk can do no wrong. So if the stock market rallies, it will likely drive faster.
The bullish thesis for Tesla is complex, and this is a good thing. Consensus is that they are not a car company, but rather a technology or an energy company. Its future does not solely depend on people buying cars. I remain skeptical because like last week, the headline was once again about car production performance — not on a milestone for one of its other verticals. However, I would not short it based on that because we all know it can rally for days. It is hard for bears to fight ghost concepts.
Those who love it should just own it for years. Otherwise, it is best to trade the chart action irrespective of its fundamentals. As it rallies back, TSLA stock has resistance through the $550 area but if the bulls break out from $565 then they could target $640. Meanwhile, it must not lose the recent lows because then the opposite can happen on the downside. Luckily, it has two support bands underneath it.
Ford (F)
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The recovery for F stock after the financial crisis was epic, as it rallied 1,600% from its $1 low. Back then management had the better financial position, and they reaped the rewards. The brave investors who bought it near the bottom made a killing.
This time, however it’s not that obvious but it could be a similar setup. Ford has adoring fans on the main streets of America. The investors just need new reasons to fall back in love with the stock.
But of the three car stocks here, Ford is the one that worries me the most. Management has done very little to impress investors even before the coronavirus. But maybe this jolt in business disruption will snap them back onto track like a fresh reboot.
There are clues in the F stock chart, and it needs to hold above $4 per share else it opens the door for a new chasm below. The price action is tracing out a descending wedge that presents the bulls the opportunity to snap out of it with a little help from the general market. My base case is that Ford will come out of this. We know it can rally because after it briefly fell below $4 per share, it immediately rallied 45% off that low. It has since given most of it back but it shows that there is risk appetite they just need time or encouragement.
They would need to break through a lot of resistance levels like the one at $4.60 per share. This has been pivotal of late, so buyers and sellers will want to fight it out there.
Nicolas Chahine is the managing director of SellSpreads.com. Join his live chat room for free here. As of this writing, he did not hold a position in any of the aforementioned securities.
