According to the finviz portal, the industry that has been most overvalued in global markets in 2022 is car manufacturers. Here, the average company discount has been as high as 58% since the beginning of the year. Seth Klarman, one of the top US investors who founded and heads the investment firm Baupost Group, often recommends looking for investment opportunities by looking at the list of the year's biggest losers. With this in mind, let's take a look at the state of the industry and whether we could find potential investment opportunities there?
A tough year for the automotive industry
All the factors that affect this industry may have worked against it recently. It was not insignificant that automotive companies are characterised by high production costs and relatively low margins. The rise in inflation in the United States to currently 7.1% year-on-year. was reflected by higher costs in companies' operations. Interest rates rising at the fastest rate in 20 years probably also gave automakers no reason to be happy. Limited access to cheap credit may have reduced demand for such goods.
However, light at the end of the tunnel may be provided by falling commodity and raw material prices. Inflation is now falling for the fifth consecutive month in the United States, down from 9.1% year-on-year, and in the euro area it now appears to have peaked at 10.6% year-on-year. However, it is important to remember that falling inflation means further rising commodity prices. The only variable is their rate of increase.
Overview of the industry by key indicators
Klarman, mentioned earlier, draws attention in his strategy to the aspect of 'margin of safety', i.e. how long a company could still survive in a worse period. There could be several factors influencing this aspect, e.g. the stock of liquid assets (e.g. cash) relative to the company's liabilities, the amount of margin (companies with high margins are those that have some sort of competitive advantage, which allows them to offer their products more expensively than the competition) or the amount of debt relative to the company's own assets (the so-called financial leverage level). The latter factor in particular often becomes a reason for the bankruptcy of a company.
On a positive note, Niu Technologies (NiuTech) seems to fulfil all of the above. It is a Chinese company that manufactures and sells electric scooters. The company was founded in 2014 and has quickly become one of the market leaders in China. Niu Technologies offers a wide range of products for different segments, including premium products and cheaper options. The company also operates in Europe, Asia and Latin America. The company's cash to liabilities ratio, known as the quick ratio (QR), is a measure of the company's ability to pay its current financial obligations. It currently stands at 1.3 for Niu Technologies. This means that the company is able to repay its financial obligations at any time. The second aspect of the 'margin of safety' is the net profit margin, which currently stands at 0.9%. Although this is down from a level of around 7%, positive margins currently appear to be a rarity for the industry; according to the finviz portal, barely 15% of companies in the industry can currently demonstrate such an achievement. Niu Technologies has a debt-to-equity (leverage) ratio of 0.26, which may further speak of its safe situation. Analysts' average predictions for profit growth are as high as 250% year-on-year.
Source: Conotoxia MT5, NiuTech, Daily
Another company that appears overvalued is General Motors Company (GM). The US automotive corporation manufactures, sells and services cars, vans, motorbikes and other motor vehicles. The company is one of the largest car manufacturers in the world and has a wide range of brands including: Chevrolet, Buick, GMC, Cadillac, Baojun, Holden, Wuling and Jiefang. The company's Quick Ratio liability coverage ratio currently stands at 1.00, giving it a relatively high level of safety. The net profit margin looks better than for Niu Technologies, at 5.8%, and does not appear to be declining significantly despite the negative macroeconomic environment (the maximum for the past five years has been 9%). The company's debt-to-equity ratio, which stands at 1.19, may be negative, causing net profit to deteriorate if central banks continue to raise interest rates. However, General Motors Company's strength appears to be its huge free cash hoard, which amounts to 36% of the company's market value.
Source: Conotoxia MT5, GE, Daily
Grzegorz Dróżdż, Junior Market Analyst of Conotoxia Ltd. (Conotoxia investment service)
Materials, analysis and opinions contained, referenced or provided herein are intended solely for informational and educational purposes. Personal opinion of the author does not represent and should not be constructed as a statement or an investment advice made by Conotoxia Ltd. All indiscriminate reliance on illustrative or informational materials may lead to losses. Past performance is not a reliable indicator of future results.
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