Be careful with car stocks…

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More than half a million consumers visited the Brussels Car Fair in January. It was much busier than anticipated, so the doors stayed open longer for everybody to be able to pick their cars. This year, the counter was 1,06% higher than in the year 2016.

These fantastic numbers pushed the car index sector to 690 points in January, and with that, it was game-over. On 17 March 2015, the same index reached one point higher, but the results where as distressing as the current correction in 2018. 

If history repeats itself, the worst is yet to come, and we first have to go in the direction of 425 points before the prices recover.

If you set the price history for each car manufacturer t0 30 years, it becomes clear that the ‘buy and hold’ method offers much less potential in this sector than getting in at the right moments.
As such, stocks from the car sector are only suitable for active investors who will consistently get out when the trend turns. 

In using a 200-day average, you can clearly tell this from the 20-year long-term graph (graph 1). Over a period of months to years, the price quotes above its average (indicated in green), to subsequently quote below it in the next months or years (indicated in red). 

Are these good fundamental purchases?

If you follow car stocks fundamentally, at which level are you getting in? Today the European car manufacturers quote a price/profits proportion of only 6,2 and a dividend yield up to 7%!

There is a reason for these attractive sales. Return and risk always go hand in hand. What do you do if the company suddenly can’t realize its dividend anymore? 

Where did it go wrong in 2018?

It is better to wonder what could cause the negative trend to turn. Basically, everything negative that such a sector can go through happened:

  • Court cases regarding CO2 emissions;
  • software in need of alteration;
  • cars returning to the factory;
  • new environment laws;
  • consumers who hold off buying until they have more certainty on the difference in cost price between gasoline, diesel or electricity;
  • prohibition of cars in big cities;
  • the infamous Trump trade war;
  • terrible car-sales numbers from China, the worst in 15 years;
  • and added to all that, a general negative market climate since the end of September.
EuroStoxx 600 Automobiles Sector

On graph 1, it becomes apparent that the car index is once again nearing the top from eleven years ago. This is the 400-point zone, indicated with a horizontal, light red coloured band. In 2014 and twice in 2015, this zone offered a nice support and the index recovered. In other words, a first important signal to keep in check. Additionally, you will see the primary support S1 currently quoting at 435 points. Subsequently, the secondary support line S2 again quotes around 400 points.

This merger of two supports around the same price level is called cluster formation. It attracts bargain hunters. If there are fundamental signs that point towards improvement, consider the first purchase around 435 and a second purchase around 400 points.

Should the car index drop below 400 points, we can expect a sharp crisis, since car companies have a central place in the economy.

Mutual performance of European car stocks

In graph 2, note Peugeot’s strong performance against other automobile companies.

Peugeot’s performance is 10% better than the main index of Eurostoxx 600, and 25% better than the Stoxx Europe 600 Car Index. In one year, Peugeot outperforms its sector peers by 25% on average. This is a surprising performance, and those are stocks to follow up on. 

Automobile company Peugeot

On graph 3, note Peugeot’s upward trend since the crisis in 2013. However, the share did experience a relapse, and the chance that the company will no longer be able to resist the sales pressure is real. If the Eurostoxx Automobile Sector falls more towards 435-400 points, a price level of 18 euros is near.

Conclusion

The automobile sector has once again been hit economically by a series of setbacks. Considering the cyclical price level, car companies are 0nly suited for trend investors that deal consistently. Buying is best done in stages, taking into account the volatile nature of this sector. Determine your stoploss before you get in, in case your expectations aren’t met. 

Consider investors who bought the share Peugeot in 2011: without stoploss, they saw their investment decrease from 22 to 3.5 euros (-84%). This happened even though the share quoted at 48 euros a few years prior… Be careful! 


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Paul Gins
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The trend is your friend

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