Wall Street's Dead Wrong about Cars — Here’s How to Profit
Andrew Zatlin here with a brand-new issue of Moneyball Economics.
Let me tell you — when it comes to the future of the car industry, Wall Street’s got it all wrong.
In my latest video, I’ll explain why…
Then I’ll share my strategy for profiting from this industry’s future!
For a full transcript of this video, see below.
Wall Street’s Dead Wrong about Cars — Here’s How to Profit
Welcome to Moneyball Economics! I'm Andrew Zatlin…
Or as some people this week have been calling me, [Zatlin rubs beard] “Scruffy McGee.”
Because, you know what? I'm on vacation, and I'm not shaving.
I want to start by wishing you a wonderful new year. I hope you and your loved ones are set for a fantastic end of 2021 and a fantastic start to 2022.
And frankly, that's what's on my mind right now:
How to set 2022 in motion for financial success — including a big bet on the auto industry.
Opportunities Aplenty
I've been talking a lot recently about how I’m planning to position my portfolio going forward.
And one of the themes is electric vehicles. That's a long-term play for me.
In the short-term, though, the main theme is all about “normalization post-COVID.”
And we’ll look at some sectors where there are opportunities.
For example:
- Interest rates are at historic lows. But guess what? They're soon going to be moving again.
- As it relates to travel, about 1.5 million people flew this holiday season, compared to 2.5 million in 2019. That's a big gap. And I want to be prepared for the consequences.
- And elsewhere, the auto industry is experiencing its own big gap.
In fact, I believe that very soon, sales in the auto industry are going to be rising. And I want to be positioned correctly.
You see, I think we're going to start off with a bang, and end with a fizzle.
Let me explain…
Priced for Perfection
To start, we've got an opportunity to ride the auto industry hard…
Or do we?
I think stock prices in the industry are fully “baked in.” In other words, there’s a lot of upside here — but it's already priced for perfection.
Let’s look deeper…
A Major Supply Problem
Let's start with the basics:
This chart shows how many cars and trucks get sold in America.
And as you can see by the black line going across the top, Americans typically buy 17 million cars a year.
When they don't, however — well, you can see that big recession. That represents a slowdown in demand.
But do you see more recently where there's a dip closer to 12 million?
Well, that's not a demand problem. That's a supply problem.
The auto industry can’t get semiconductors and other core components, so they can't make cars.
And what's happening as a consequence is an example of classic economics…
A Good Time to Make Cars
In brief, prices are getting bid up — in fact, if you haven't recently bought a car, you’d be shocked.
Look at what's going on with Ford and GM:
30% fewer cars are being sold today versus what’s normal.
But look at the revenues for Ford and GM…
It's as if nothing has happened!
And the reason is, there’s a supply shortage. So consumers are bidding up prices.
There's a 28% drop in the units sold…
But there's an equal and offsetting 28% jump in prices!
So prices are up, year-over-year, almost $11,000. To put that into perspective, in the five years before COVID, prices went up a total of 12%.
Meanwhile, in one year during COVID, they've gone up almost 30%. It's crazy!
And remember, this is pure profit. It's not just that revenues are staying steady.
They're more profitable at Ford and GM because it's all upside. This is just extra money that consumers are willing to throw at them — until competition sets in, that is.
Wall Street is Wrong!
When is competition going to set in?
According to the markets, it’s not going to happen in 2022.
There will continue to be parts shortages…
Which means there will continue to be a shortage of cars out there…
Which means consumers are going to continue to have to bid up prices.
That’s what Wall Street is saying. But I'm telling you right now:
Wall Street is wrong!
Consumers cannot and will not continue to pay another increase of 10% to 20% in prices. They can't pay another $5,000 to $10,000 for a car — and spoiler alert: they're not going to have to.
So let’s talk about what the expectation is.
You see this? That's Ford stock price. As you can see, it’s up massively. It’s never been this high.
And keep in mind, it's not as if Ford is going above its normal production. It’s just getting back to normal.
But its stock price is acting like it’s double or triple what it would be doing.
And it’s the same thing at GM.
This is GM's stock price compared to the U.S. auto sales.
When auto sales are down, that jams prices up. And remember, that's pure profit for GM and Ford.
And guess what? Usually there's a substitute “good thing” going on…
For example, what's good for new cars is bad for used cars, and vice versa.
Well guess what? In a shortage situation, everybody wins.
It’s Madness!
So again, you saw Ford’s and GM’s stock prices.
Now look at the madness with CarMax, a used car seller.
And look at the madness with AutoZone, an auto parts retailer.
If you can't buy a new car, you’d better spend money taking care of the car you have.
In other words, the auto industry is enjoying the “boom” part of a boom-bust cycle.
So when does it cycle back down?
Upside Baked Right In
GM’s stock price is already up 70%. Ford’s price has doubled.
These companies are already priced for what's coming down the pipeline and “normalization.”
And again, under “normal” production circumstances, they wouldn't be seeing these stock prices.
So I'm raising my hand right now and warning you:
There's a lot of upside already baked in here.
Let's also look at the relationship between used cars and new cars…
Used vs. New
Right now, people will buy anything because they need a car.
Five million units this year alone are in shortfall.
Typically, used cars compete with new ones. So as new cars come online, you’d imagine that the price of used cars would be under threat.
Because remember, there's also another element here to consider:
Used cars haven't really been driven that much. We've got three years of short-term leases that are finishing up next year: 2019, 2020, and 2021.
And we've got a lot of cars coming off leases that weren't driven that much. [Zatlin chuckling] Because, let's face it: very few people drove in 2020 and a lot of 2021.
So you've got some really “un-used” cars coming available soon.
At the same time, we've got a lot of supply from the used market, and we have a lot of supply coming out from the new market.
Here’s what that means…
Trouble Ahead
I believe we're going to have a lot of problems in the second half of 2022 as supply continues to come down the pipeline.
In the first half though, we're not going to get there quite yet.
We’re barely going to be pushing up to 14 million, maybe 15 million cars in the first half.
Again, there’s a shortfall. There will be pricing pressure. That's just money going right into the pockets of GM. That's going to support the stock price.
But when things normalize in the second half of the year — and if the economy does start to slow down a little bit — it's trouble ahead.
Hot Deals Incoming!
So we've got the three-year leases I mentioned, and we've also got these barely-used cars in great shape…
And as the year progresses, more and more cars are going to come up.
Quite frankly, this is not a demand problem. Demand is there.
Rather, it's a supply problem. And the supply problem is being met.
Do you honestly think GM and Ford will maintain their stellar stock prices purely on the strength of today's supply shortage?
Do you really think people will sit around and continue to pay this massive amount of auto inflation?
Or is it likely that we're going have some car companies start to bolt, and maybe drop their prices a little bit (or at least not raise them) or offer some screaming hot deals in terms of giveaways?
My Advice to You
The bottom line:
The consumer cannot continue to pay at the 20% clip they've been paying…
And I'm saying they won't keep paying it.
So that expectation of 5 million cars staying at this rich price point — that's what Wall Street expects.
But I'm going contrary on this one:
I think the auto industry is strong in the first half…
But I think the second half is very much up in the air.
For my readers, I advise you to go strong now…
But maybe don't go as strong in the second half of the year.
And in the meantime, I’ll be sharing some specific ideas with you.
Zatman, out!
Happy new year, and I’ll speak to you soon.
In it to win it,
Moneyball Economics