Please ensure Javascript is enabled for purposes of website accessibility

This Stock's 60% "Trump Rally" Fueled More by Hype Than Fact

By Daniel Miller - Mar 6, 2017 at 9:51AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

This automaker has drastically improved its business and profitability since the Great Recession, but the 60% rally it has enjoyed since Trump's election could be short lived.

Regardless of what you think about President Donald Trump, love him or hate him, there's no question the stock market sees him as pro-business, which is why share prices have taken off since his election. Only about a month ago, people were printing T-shirts and hats boasting of Dow 20,000, a meaningless benchmark that was just made even more irrelevant when the Dow closes at 21,000 for the first time ever Wednesday.

This rally has lifted many stocks, but not all of the Trump-powered hype around specific companies is truly worth buying into.

Why people think Trump could help this automaker

FCA's Ram Truck at a work site

FCA's Ram Truck. Image source: Fiat Chrysler Automobiles.

Trump has sniped at many companies via Twitter, but his ire specifically at automakers "moving" jobs to Mexico drew a lot of attention. However, one car company with the potential to benefit from his anticipated policies is Fiat Chrysler Automobiles (FCAU). Here's a look at how the market has treated major automakers since the election.

FCAU Chart

FCAU data by YCharts

The driving force behind FCA's recent stock price surge is simple: It has the most to gain if Trump relaxes the tough fuel-economy rules put in place by the Obama administration. Sure, Ford Motor Co. (F -1.91%) and General Motors (GM -1.85%) still generate the vast majority of their top and bottom lines from SUVs and full-size trucks, just as FCA does, but the difference is that FCA has largely trailed its crosstown rivals in developing electric cars, hybrids and even self-driving vehicle technology.

Ford, for an example, announced a $4.5 billion commitment to electric and autonomous vehicles in a plan to develop 13 new models over the next decade, including seven new models within the next five years. General Motors has created an entire brand, Maven, to develop smart mobility projects. GM also acquired Cruise Automation as part of its efforts to develop autonomous vehicle technology, launched the Chevrolet Bolt as a mass-market electric vehicle with a single-charge range of nearly 240 miles, and invested $500 million in ride-hailing company Lyft. These deep-pocketed commitments from Ford and General Motors would be difficult for FCA to duplicate because it has much more on its plate amid a still-ongoing company-wide turnaround. 

FCA has a much larger debt load than Ford and GM, and is also simultaneously trying to expand its highly profitable Jeep brand overseas while reviving its Alfa Romeo brand and expanding its Maserati brand. Given FCA's easy-to-see difficulty with investing capital in more fuel-efficient vehicles -- which it would have to do if it wants to avoid stiff penalties as fuel-economy rules tighten in the coming years -- it's also clear to see how the automaker will benefit more than its competitors if Trump's team rewrites those rules. 

Detroit does have a case

If the targets aren't relaxed, automakers will have to achieve an average fleetwide fuel economy of 54.5 mpg by the 2025 model year, and no matter how you slice it, that's going to be difficult and it's going to be expensive. Moreover, conditions seem much different in 2017 than they were from 2009 to 2011, when those CAFE goals were hashed out. U.S. dependence on foreign oil has been reduced -- just last year it hit a 30-year low. And with fuel prices cheaper, it's more difficult for automakers to convince consumers to spend extra to buy alternative fuel or highly fuel-efficient vehicles. 

While Detroit would benefit from weaker standards, to what degree the rules should be relaxed is debatable. The truth, however, is that we don't yet know how Trump's administration will approach the fuel-economy standards, timeline or penalties.

And despite FCA having improved vastly since the recession, its fundamental weakness is clear: At a moment when the automotive industry is poised to evolve more in the next two decades than it has in the last ten decades, FCA its still behind the spending curve on R&D -- and that's why it isn't a stock to buy into for its Trump rally.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Fiat Chrysler Automobiles N.V. Stock Quote
Fiat Chrysler Automobiles N.V.
Ford Motor Company Stock Quote
Ford Motor Company
$11.81 (-1.91%) $0.23
General Motors Company Stock Quote
General Motors Company
$33.99 (-1.85%) $0.64

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 06/28/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.