What happened
Shares of Avis Budget Group (CAR +1.99%), Group 1 Automotive (GPI 2.72%), and Cars.com (CARS 2.88%), various automotive stocks, all jumped over 10% Wednesday morning as the industry prepares for Memorial Day weekend, the first big promoted shopping event since the COVID-19 pandemic hit the U.S.
So what
There are a number of developments that could be driving various automotive stocks higher Wednesday. Many entities are preparing for a big holiday weekend at auto dealerships. Edmunds noted that car shoppers can expect larger than usual discounts since there are more prior-model-year vehicles on dealership lots than we historically see in May, a scenario that will provide consumers larger incentives as dealers try to sell through older inventory. And there is certainly some deferred demand waiting to get back on dealership lots: Cars.com revealed Wednesday that its research showed that 33% of consumers who planned to purchase a vehicle in 2020 intend to do so this weekend. Interestingly, Cars.com's data showed that 62% of people plan to buy a car sooner than originally planned, thanks to COVID-19 -- possibly to avoid public transportation and ride-sharing services.
Image source: Getty Images.
In addition to a likely strong holiday sales weekend that would send a positive ripple effect through the auto industry, Avis Budget Group could be rising for a couple of reasons. First, a report from The Wall Street Journal suggested that Hertz lenders were bracing for losses, as the rental-car company already missed debt-related payments in April and the two sides are far away from a deal with the looming Friday deadline. While the fallout from a Hertz bankruptcy would be big, including a potential market flooded with the selling of its vehicle fleet, Avis would likely benefit from industry consolidation. Those developments, in combination with the U.S. gradually reopening parts of the economy, could be enough for the large short interest to begin covering and pushing the stock higher.
Now what
There were also broader positive developments Wednesday. Tuesday marked the 10th consecutive day New York's death toll checked in below 200, and that daily count remains significantly lower than what was recorded in April. Ohio governor Mike DeWine announced Tuesday he was lifting mandatory stay-in-place orders, and South Korean health officials said people who recovered from COVID-19 appeared to have a level of protection from reinfection and transmission.
The automotive industry has been hard hit during the COVID-19 pandemic, and there's no question there will be serious financial pain felt when the industry releases second-quarter results. But it is positive that manufacturers are opening facilities and consumers are planning to get out in a big way this Memorial Day weekend, with intentions to purchase. Investors would be wise to take stock market volatility with a grain of salt, but there's reason to believe the economy can gradually improve during the second half of 2020, and these auto stocks appear to be reflecting that.
