When we spoke of car companies it used to only mean the big three: General Motors (NYSE:GM), Ford (NYSE:F), and Chrysler (NYSE:FCAU). Thanks to Tesla (NASDAQ:TSLA), we now have to include a whole new segment of makers of electric vehicles (EVs). Electric auto stocks are now all the rage on Wall Street, especially last week.
A relatively new entrant, Nikola Corporation (NASDAQ:NKLA), hogged the headlines as the stock surged and triggered some controversial debates over its true prospects. The trucks are cool-looking, but there are skeptics over the hydrogen element of the tech. The opinions on that one are very bifurcated. Some see it as the next Tesla, while others are suspect of its legitimacy. This debate will continue for a while.
But first, nothing can happen without a healthy economy. Our globe is sick from that perspective and I don’t mean the affliction of Covid-19. The human tragedy there is grave and sad. But business-wise, I fear that the side effect of the medicine our leaders chose has very serious side effects. Families will suffer from the physical sickness, but companies are suffering from the disruption in sales. The quarantine may have sealed the fate of many struggling businesses, resulting in fewer autos sold.
The discussions among investors about ‘peak auto’ has been in circulation for a few years already. Vehicle sales have been so strong that experts were counting the days until it ends. Yet, every year consumers stepped up to the plate and kept the pace going. This year the drop is going to happen, but not for the reasons experts thought. The quarantine forced the entire globe to shelter in place, so few were driving, let alone shopping for cars and trucks.
There is great uncertainty about how demand will change going forward. Logic dictates that there will be less demand. After all, we have 20 million people out of work, maybe more. This cannot be good news for auto manufacturers or auto stocks.
There is another school of thought that the fear of contagion might force people into owning their own vehicles so that they have less interaction with strangers. I think it is too early to tell. Meanwhile, let’s discuss these three stocks for today’s opportunities:
- Tesla (TSLA)
- Ford (F)
- General Motors (GM)
Auto Stocks to Trade Into 2021: Tesla (TSLA)
Tesla has the first mover advantage in popularizing electric cars. The concept has been around since the 1880’s, but not until the Model S did it become mainstream. It is amazing that TSLA stock is now a raging success while Ford and GM are barely surviving. One could argue that Tesla even has a better balance sheet.
Elon Musk deserves all the credit because he has not followed the rules. In fact, he owes much of his success because he is not afraid to crack a few eggs. He shoots for the moon and even though he misses the mark, the end results are still very high.
Amazingly, Wall Street is willing to forgive his sins quickly. For example, last year he said that Tesla would have one million self driving taxis by now and no one is upset that there’s not even any talk of it. This reminds me of Microsoft (NASDAQ:MSFT) vaporware of the early tech days.
While I don’t condone owning TSLA stock at a grand, this is one to own for the long-term on dips. I bet there there will be much cheaper entry points into the stock, so be ready to pounce. Or investors can use the options markets to get long the stock for free. The idea is simple, especially for someone ready to buy the shares right now. The risk is great to own them outright. Using options, I can get long now but leave a 20% buffer from the current price.
It is easy to lose focus, or actually have too much of it. Investors need to realize that regardless of how good the stock story, it needs a healthy economy to thrive. The first level of support is around the $850 level in case there is downside momentum from last week’s Goldman Sachs and Morgan Stanley downgrades.
Ford (F)
Every good thing I mentioned about Tesla, flip it and you get my opinion of Ford. Management has been underwhelming to an extreme degree. The best thing I can say about it is that they didn’t go bankrupt like GM did after the financial crisis.
Nevertheless, it remains a great American icon company that deserves a rosy future. Leadership needs to step up its game to make that happen. The Ford fans are extremely loyal. My immediate family are die-hard Chevy truck people. In fact, my 19-year old son builds trophy trucks out of them. But on another side of the family it’s strictly Ford. I am not sure how long the fans can remain loyal if they don’t drop a little pizzazz into their offering.
Management hasn’t had a positive reaction to an earnings report in over a year. Whatever they think they are doing needs improvement. It doesn’t matter that the Ford team thinks it is on the right path, just listen to the people. The company needs a new direction. This stock is my least favorite out of the three. At least GM has better Wall Street cred, so when the world goes back to normal it would only need time to recoup. Ford still needs that on top of dealing with its internal struggles.
The good news is that F stock has fallen into a support zone. The Covid-19 low was too extreme so I expect buyers to step in to hold above $5.50 per share. Fading from $7.75 was sad but necessary because a 90% rally needs to breathe. The next opportunity is if and when the bulls are able to rally above its recent fail so they could target $9.50 per share or higher. It won’t be easy and they will definitely need the help of the overall market.
General Motors (GM)
Wall Street believes that GM CEO Mary Bara has done a great job, which has earned her a lot of respect. It’s too bad that they don’t extend that same level of it into GM stock. Year-to-date it’s down 26% which is still almost 10% points better than Ford. Tesla remains the king of the U.S. auto stocks up 132%. Investors should respect this rank because that’s the right order of the stocks by today’s standards.
Fundamentally GM stock is cheap with an 8 price-to-earnings ratio. Its stock price is only .3 times its sales. But the problem is that we don’t know what the “e” is going to be in the post-quarantine era, so 8 P/E could turn out to be a trap. This is much cheaper than Tesla’s metrics and Ford has no fundamentals to report. In all fairness, Tesla is not a good comparable because it is a growth company and its thesis is more than a car maker.
Technically, GM like most stocks has had a great rally off the bottom but now has to deal with resistance. Onus is on the bulls to prove that they can overcome the overhead supply in GM stock. Once they do take it out, it will become a good momentum trade opportunity. Meanwhile, traders can be patient and not anticipate the spike. But this is not the same for investors who want to hold the stock long-term. The stock is definitely broken, but the company is not. For this bunch the short-term gyrations are not important.
Last week we saw a nasty 6% drop in equities in one day. This week it will be important to see how the bulls psyche holds up. This morning stocks are struggling again so it’s not off to a great start. There is no risk to buy any stocks, but if someone is itching to buy auto stocks, Tesla, GM, and Ford is the order by which I would rank them.
Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities.
