Traffic warning: There's a big jam of car stocks on the highway Wednesday afternoon, red lights as far as the eye can see -- and investors in automotive stocks should probably expect delays before their stock prices recover.
As of 1 p.m. ET, shares of Ford Motor Company (F -0.68%) are down 4.1%, and its archrival General Motors (GM -0.68%) is off 4.8%. Meanwhile, Avis Budget Group (CAR 0.12%), the car rental company and sometimes used car seller, is performing twice as poorly as the automakers who sell it its cars -- down 10% on the nose.
You can probably thank Europe for much of this mess.
Granted, the whole sorry stock market appears to be in the red this afternoon, with the Dow Jones down 2.5% and the S&P 500 as a whole faring even worse -- down 2.9%. Multiple retailers (albeit in unrelated industries) reporting significant underperformance on earnings due largely to high transportation costs, supply chain issues, and inflation are probably part of the problem. It makes sense that, if these problems are plaguing one company, other companies are probably being affected as well.
Inflation in particular poses concerns for automakers, because an 8% increase in the price of a $46,000 automobile obviously is going to have a bigger effect on sales than an 8% increase in the price of a $2 tube of toothpaste. Rising interest rates -- designed to lower inflation -- are also cause for concern, because 85% of new cars in the U.S. are bought on credit, and the price of that credit is going up.
And indeed, an early report from Europe suggests we may already be seeing this effect. According to the European Automobile Manufacturers Association (ACEA), April new car registrations in Europe dropped 20.6% year over year. This "cars specific" data may explain why car stocks are getting hurt worse than most today.
Admittedly, ACEA pointed the finger mainly at supply chain problems, saying they were the primary cause of the drop. But even so, you have to figure that inflation and rising interest rates played a part as well -- or perhaps worse, if they aren't yet playing a part, then they soon will, and the numbers will get even worse!
When you consider further that the 684,506 car registrations reported by ACEA was the lowest number ever reported since the agency began counting new car registrations, that bodes pretty poorly for the auto industry, I have to say. Still, this is the price of investing in cyclical industries after years of sales rising; they do eventually go back down.
But...then they go back up! If you're a long-term investor, and have faith that the cycle that's always repeated itself will continue to do so, then I have to say: Buying Ford stock today for less than five times trailing earnings, buying GM for less than 6.5 times earnings, and yes, even buying Avis Budget at a meager 6.6 times earnings just might be a great way to play the eventual return of the cycle's upswing.