To say Mr. Market's slightly bipolar right now would be an understatement. One day, he thinks the global economy seems poised to crumble. The next, the coast is clear. And although markets tend to get prices more or less correct over the long term, diverging opinions in the short term can create some pretty interesting opportunities.
And with Mr. Market feeling pretty paranoid about the strength of the global economy, stocks tied closely to the economy haven't gotten a lot of love. Automobiles, airlines (with the help of some bankruptcy rumors), and the like have seen their share prices sink as the supposed recovery seems more and more frail.
The Great Recession put car companies through the wringer in particular, but they emerged stronger as a result. These companies, even though clearly tied to the consumer, have been racking up profits of late. Is now the time to buy, or should investors avoid this sector like the plague? A few of the Fool's most ardent gearheads weigh in with their thoughts on the matter to tell us which stocks, if any, they think look like sound investments. Enjoy!
John Rosevear, Motley Fool contributor
Are auto stocks cheap? I'd be wary ofToyota (NYS: TM) and Honda (NYS: HMC) right now, but on a historical basis, Ford (NYS: F) and General Motors (NYS: GM) are crazy-cheap. Ford's P/E is barely half its historical norm, and GM's is even lower. In fact, GM's stock price has fallen so far that its market cap is close to its cash on hand.
These valuations aren't really due to weak fundamentals, because the fundamentals mostly aren't weak. Ford has a great product lineup, and its management team has enough of a (sterling) track record at this point that we can assume that they will continue to execute well. GM has further to go with its products, and the overhangs of continued government ownership and a possible big pension liability will probably weigh on the stock price for awhile. But pension issues excepted, the balance sheet is in great shape, and management is doing a good job of convincing me that GM's turnaround is finally on the right track.
But that doesn't tell the whole story.
For someone looking to buy today, the question isn't really about fundamentals, it's about the macro environment. Unless things get very bad, both companies will continue to make money, but how much money is an open question. These are cyclical stocks. Earnings for both are very closely tied to the level of auto sales in the U.S., and that in turn is tied to the economy. If you think the recovery will resume, GM and Ford both look like great buys right now. But if you think a downturn is brewing, then these might not be the stocks you're looking for.
David Williamson, Motley Fool financial editor
How does M. Night Shyamalan keep getting to make movies? Who keeps electing Marion Barry? Why do Jersey Shore cast members make more than my doctor? These are things I have no explanation for. It's time to add another to the list: Why are domestic auto stocks stupid cheap?
I agree with John: It's the U.S. automakers that investors need to focus on. The Japanese carmakers suffered from supply-chain disruptions caused by the tsunami, but it's unfavorable foreign exchange rates that are causing the most pain. The yen recently hit a 10-year high versus the euro. But it's not just EU worries for Japan: The dollar has declined 10% versus the yen over the past six months. This relative strength compared with other currencies is punishing the bottom line. Honda just announced a goal of halving its Japanese production over the coming decade, and Toyota recently announced that foreigh exchange pressure has helped to cut $4,000 off each car it sells in the United States. Combine this increased pricing pressure with the aggressive expansion from South Korean competitors Hyundai and Kia, and suddenly there's a black cloud hanging over the Land of the Rising Sun.
Here in the U.S., it's an entirely different story. All of the major impediments have been removed for Ford and GM. The seasonally adjusted annual rate (SAAR) is trending above 13 million vehicles. Sure, that's a far cry from the 16 million-plus in the pre-crisis era, but it's still well above the 10 million-to-11 million-unit baseline that the restructured industry needs to be profitable. Secondly, the UAW, after a fair amount of posturing, agreed to business-friendly deals and removed the risk of potential disruption.
Sure, the macro environment is lousy, but these are two businesses now built to withstand the apocalyptic conditions we saw at the depth of the crisis. What's more likely: another total collapse of the financial markets and business demand, or a muddling along with low growth as Japan has seen since its real estate-driven financial crisis? I think it's the latter. And because of that, I see this as a great opportunity for investors to add high-quality businesses to their portfolios at cheap prices.
At the time thisarticle was published David Williamson owns shares of GM and Hyundai. John Rosevear owns shares of Ford and GM. Andrew Tonner owns no shares of any of the companies mentioned in this article. The Motley Fool owns shares of Ford.Motley Fool newsletter serviceshave recommended buying shares of Ford and General Motors. Try any of our Foolish newsletter servicesfree for 30 days. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.