Detroit Is Burning, but Ford and General Motors Are on Fire


Although we don't believe in timing the market or panicking over daily movements, we do like to keep an eye on market changes -- just in case they're material to our investing thesis.

Following three consecutive days of losses, the downbeat sentiment crept into Wednesday morning, as stocks opened lower. The S&P 500, and the narrower, price-weighted Dow Jones Industrial Average , were down 0.4% and 0.3%, respectively, at 10:01 a.m. EST.

Yesterday, a federal judge ruled that the city of Detroit is eligible for chapter 9 bankruptcy protection, opening the road to debt restructuring negotiations in the U.S.'s largest municipal bankruptcy. However, while Motor City is struggling with a financial crisis, motor vehicle manufacturers Ford , General Motors , and Chrysler have emerged from theirs. In fact, judging by the sales figures for November, they're in rude health.

The No. 1 automaker by sales, General Motors posted a 14% year-on-year increase in the number of vehicles sold, with sales of its Chevrolet Malibu midsize sedan enjoying a 41% rise. No. 2 Ford saw sales increase 7%, while No. 4 Chrysler displayed the strongest improvement, with a 16% year-on-year growth.

All three exceeded expectations with those numbers, and the No. 3 automaker by sales, Toyota, also performed well, announcing 10% sales growth in November. All told, the seasonally adjusted annual rate of sales in November is now forecasted to exceed 16 million -- only the second such month since the financial crisis took hold (see graph below). Lower oil prices, and favorable credit conditions, have encouraged consumers to swing for a new car.

US Auto Sales Chart
US Auto Sales Chart

US Auto Sales data by YCharts

While one month's sales figures aren't a legitimate reason to buy auto stocks, they are a good opportunity to look at the companies with a fresh eye, and evaluate their prospects against their share prices. Yesterday, Morgan Stanley auto analyst Adam Jonas published a report in which he named Tesla Motors his top pick among the 26 auto stocks that Morgan Stanley covers on the basis of (expected) risk-adjusted return.

I'll agree that Tesla's growth prospects are better than Ford's or GM's; but, in the stock market, slow and steady -- and poorly rated by investors - usually wins the race over racy and expensive. As I wrote yesterday, "Established automakers Ford and General Motors , both of which are valued at less than 10 times next 12 months' earnings-per-share estimate (as opposed to Tesla's 129 multiple), look like the much better risk-adjusted values."

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Fool contributor Alex Dumortier, CFA has no position in any stocks mentioned. The Motley Fool recommends Ford, General Motors, and Tesla Motors. The Motley Fool owns shares of Ford and Tesla Motors. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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