Barring economic calamities comparable to the Great Depression or the global financial crisis, high-net-worth individuals don't dramatically alter their spending habits as the rest of us do. Garden-variety recessions, while painful for the middle class, typically don't dent affluent folks' desire for high-end items, travel, and the like.
Given that the wealthy are, well, wealthy and that the U.S. economy is growing, statistically speaking, Ferrari (RACE 1.84%) should be a prime example of a consumer cyclical winner. Yet shares of the Italian sports car manufacturer are off 21% over the past year. That sounds even worse, given that a bear market is defined as a decline of 20% from a stock's most recent high.
The check engine light is on for this automotive stock, but that may be an opportunity. Image source: Getty Images.
Bear markets are unsettling, but those conditions can also nurture opportunity. Perhaps Ferrari management concurs, as the company has repurchased over $117 million of its shares since the start of this year. That's one sign that the opportunity may be knocking with this stock, and there are more to evaluate.
Ferrari stock can accelerate
While this is widely discussed with Ferrari, investors shouldn't discount the aura of exclusivity and the country club vibe, which are integral to the investment thesis. Average selling prices on new Ferraris range from $250,000 to $700,000-plus. In many parts of the U.S., those are home values.
That's by design. Ferrari isn't Ford Motor Company or Tesla. It's not attempting to sell large numbers of automobiles. In fact, in its roughly 11 years as a publicly traded company, Ferrari's unit sales per model year have been relatively steady at around 1,000. From another perspective, the company is engaging in population containment. More Ferraris on the road diminishes the air of exclusivity, potentially damaging the fundamental case for the stock.
Is it arguably tacky that buyers can access select Ferrari models only through invitation? Perhaps, but between that and the company's pricing power and its quality-over-quantity business model, it's clear that management is defending Ferrari's brand value. That's something for long-term investors considering this stock to chew on.
NYSE: RACE
Key Data Points
Ferrari does have some commonalities with "ordinary" automakers. Namely, it has to keep its product lineup fresh. While its supercar cycle is a new model every three or four years, it also introduces more "attainable" models annually, which could be near-term catalysts for the stock. Emphasis on "near-term" because the convertible Amalfi Spider is expected to launch this month, and Luce, the manufacturer's first fully electric vehicle, could come to market this year.
Ferrari has a fortress
Investors who know history know there have been periods when legacy automakers, including the domestic giants, have tested shareholders' (and taxpayers') patience. Much of that negativity was attributable to flimsy financials.
That's not a cause for concern with Ferrari. The company has one of the strongest balance sheets in the industry, and it has proven adept at generating cash flow.
Ferrari also puts that cash to good use. It pays a dividend, and the 35% payout ratio implies the company isn't stretched thin by the payout. Something else investors can take to the bank is the automaker's commitment to trimming its share count each year.
