In the investing game, knowing what stock not to buy is equally important as knowing which stocks to own. Two industries that I find particularly weak are autos and airlines. These industries face tough competition and low stock valuations. Two companies in particular are lagging behind the S&P 500 (SNPINDEX: ^GSPC) by a fair margin. They face significant hurdles in their businesses that will need to be overcome before their shares can compete with the broader market.
1. Ford
I love cars as much as the next person, but car companies are not always the best investments. Shares of Ford Motor Company (F +0.68%) have underperformed the S&P 500 by roughly 53% over the last five years.
It's easy to fall into the value trap with stocks like Ford, which trades at less than 13 times earnings. The problem is that auto stocks, with the exception of the wild ride that is Tesla (TSLA +0.44%), rarely see their earnings multiples rise above the high single to low double digits. That means they have to create remarkable financial growth for their stocks to have big gains.
NYSE: F
Key Data Points
The headache for Ford this year is electric vehicles (EVs). It reported a $1.3 billion loss on its EV sales in the first quarter of the year.
That's right -- the future of automobiles is beating up Ford. What's worse, the headache is likely to continue for the rest of the year. Management reported that this year it expects $5 billion in losses as measured by earnings before interest and taxes (EBIT) from its Model e cars, which is Ford's line of EVs.
It's not that Ford hasn't created some good growth. Revenue increased 16% in 2022 and 11.47% in 2023.
The problem is that investors are not willing to forget the calamity of the 2008 financial crisis and the subsequent bankruptcy of several major automakers. It has been clear over the last decade that investors have very little intention of paying large premiums for shares of major automakers. General Motors (GM +1.06%) trades at less than 6 times earnings; Toyota (TM 0.49%) trades at less than 10 times earnings.
Investors just don't seem comfortable paying big premiums for a sector that is so exposed to economic weakness. Whether it's a traditional internal combustion engine or an EV, most of us are going to be less keen to buy a new car if the economy tanks. Because of that, investors are rightly justified in being cautious about valuations when it comes to car stocks.
2. Spirit Airlines
To say that Spirit Airlines (SAVE +0.00%) has had a rough year would be an understatement. Shares are down by a painful 77% after the hoped-for merger with JetBlue (JBLU 0.12%) was blocked by regulators.
It was a pretty devastating blow for a company that has been bleeding cash for several quarters. Travel has rebounded from the worst of the pandemic, but Spirit's performance has not.
OTC: SAVE
Key Data Points
The low-cost airline has consistently lost hundreds of millions of dollars annually since 2020 despite some fairly decent revenue performance. Collectively, Spirit has lost $1.9 billion over the last four years, and 2024 is set to be disappointing as well.
The first quarter was a rough start, with operating revenue declining by 6.2% year over year and operating losses increasing 84.5% to $207.3 million. Spirit expects continued losses for the second quarter. To make matters worse, the airline expects to have roughly 70 jets out of service in 2025, which will cause further problems with operating costs.
Simply put, Spirit was too dependent on a buyout. It seems fairly clear that the airline is going to struggle on its own. With JetBlue now out of the running and Spirit accumulating fairly significant debts that it will have to pay back, the risk is simply too high to gamble on this one.
