As Tesla (TSLA) shares are hammered again in Thursday's trading (down 5.4% to $278.84 shortly after 2 p.m. ET) and have now fallen below their September 2014 level, it is another reminder that the auto sector is a very difficult one in which to invest.
I walked away from autos after 11 years following the sector for Lehman, DLJ and UBS and days like today remind me why I made that decision. Chinese battery-electric vehicle (BEV) start-up NIO (NIO) is trading below its $6.26 IPO price in early afternoon trading and Aston Martin Lagonda shares have landed in the market like one of James Bond's sledgehammer right hooks, trading at 1800 pence per share today after being IPO'd Tuesday at 1900p per share.
It's almost as if these new (or relatively new, in Tesla's case) issues are being treated as...companies that make cars. Yes, that the ugly reality facing investors trying to play a move from internal combustion engines to BEVs. Regardless of the powertrain, they are still cars.
GM (GM) is a prime example of the persistently low valuations placed on automakers. GM shares are bucking today's nasty downtrend in the market, but at $34.25 per share, those shares are trading at exactly 6 times Wall Street's consensus for 2019 EPS. This from a company that has landed two heavyweight investors, Softbank (SFTBY) , and this week Honda (HMC) , for its Cruise autonomous vehicle (AV) division, with Honda's investment placing a valuation of $14.6 billion on Cruise. I can't overstate what a breath of fresh air GM CEO Mary Barra has been and how skillfully I believe she has handled the nurturing of Cruise. Yet, her company still only gets 6x from the market.
So, those are the breaks, or, I guess I should say the brakes, when dealing with auto stocks. It is a cyclical industry that is reliant on low interest rates to move merchandise. According to Edmunds, the average interest rate in a new car loan in the U.S. was a full percentage point higher in September--5.8% vs. 4.8%--than in the same period last year. After eight years of cheap deals in the the wake of the 2008 financial crisis affordability is now an issue and the share prices of GM, F and FCAU are showing that.
The problem, as Elon Musk is learning, is that the incredible capital intensity of the automotive manufacturing process tends to drive capital to bigger entities. I am far from a Luddite when it comes to auto technologies, and I am big believer in a future of EVs--I am actually a bigger fan of hydrogen fuel cell cars (FCEVs) than battery electrics. Further, I am convinced that the move toward AVs will change the daily lives of billions of people on the planet.
But I am grizzled enough to know not to get sucked into buying car stocks to play emerging technologies. I am not buying GM for Cruise, because GM's U.S. sales were, quite frankly, horrible in the third quarter, and that's where the profits are generated. I am not buying Intel (INTC) for its MobilEye autonomous unit--even though I think that Israeli company is the leader in AV technology--because the semiconductor cycle scares the hell out of me. I am not buying Nvidia (NVDA) despite the extraordinary power of its chips used in AV applications for the same reason. I am not buying Alphabet (GOOGL) for Waymo, because I believe the specter of government regulation of the core Google search business far outweighs the upside from AVs. I won't buy Uber, another leader in AV research, if it is eventually IPO'd, because I believe low compensation for their drivers is going to eventually lead to much more regulation.
That was a heaping helping of negativity, but I am an active asset manager and I need to keep pace with the markets. Owning auto stocks is a good way to lose that race, and as much as I love to geek out with my car industry friends in Detroit, Munich, London and Wolfsburg about technological issues, none of them are buying car stocks, either.
The best trades are the ones you don't make. Avoiding the gee-whiz factor of auto technology, especially when preached by the P.T. Barnum of the 21st Century, Elon Musk, has been a very lucrative strategy thus far in 2018. You should keep driving on that road.