For value investors, buying auto stocks has brought more pain than profit. But there are pockets of opportunity in the sector, to say the least.
“We are value investors, and while the automakers are statistically inexpensive, investors face prospects for considerable CAPEX, reduced margins, and an uncertain outcome as it relates to electric vehicle market share,” Gabelli Funds portfolio manager Brian Sponheimer told Yahoo Finance. Sponheimer is focused on the autos and industrials sectors at Gabelli, which is headed by billionaire investor Mario Gabelli.
That doesn’t mean there won’t be a time to buy automaker stocks such as Ford, GM, and Stellantis; it’s just that at the moment, Sponheimer said, they’re just too expensive.
“GM [trading] at five times earnings or forward [price to earnings ratio] at six times earnings is expensive,” he said. “[If] the shares are going to take a 20% dip, then that might change just from a trading perspective, but we are really looking for a catalyst in stocks and it’s hard to see that right now for the traditional automakers.”
Tesla is at the other end of the valuation spectrum. Trading at 200 times earnings or thereabouts, it isn’t the kind of stock that Gabelli’s portfolio managers are going to target, but it could be. For investors, Sponheimer says it needs to have a investable thesis and perhaps a leap of faith.
“Tesla certainly become more interesting at these levels than it has been in some time,” he said. “I do think that for a company that is going to be the leader in electric vehicle development over the course of the next decade, there are some really exciting things going on, but I can’t definitively say that there’s a price that I’m loving diving into, unless I really believe that there is an AI story here that I wanna invest in.”
Traditional automakers and Tesla aside, Sponheimer and Gabelli prefer ancillary trades in the auto space. Areas with more predictable resiliency like car dealership operators are an opportunity, he said, whereas companies like AutoNation (AN) can potentially benefit from increased vehicle complexity to drive parts and service sales.
“AutoNation, which still sells through traditional dealerships new vehicles and used, is really taking advantage of what is the profit center of that dealership, to really grow that parts and service business, drive free cash flow, expand the business, and ultimately buy back quite a bit of its own stock in the process,” Sponheimer says.
Looking deeper into the small-cap value trade, slowing EV adoption means opportunity for gas-powered technology providers. New turbocharger technology is in favor across industrial and other various end markets, Sponheimer said, and companies like Garrett Motion (GTX) are poised to prosper.
Sponheimer said Garrett, well known among auto enthusiasts for its bolt-on turbochargers, is an “inexpensive stock” given the current environment with “terrific cash flow.”
Pras Subramanian is a reporter for Yahoo Finance. You can follow him on Twitter and on Instagram.
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