A New Uptrend for US Car Manufacturers?

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This week we are going to focus on three major United States car manufacturers: GM – General Motors Co., F – Ford Motor Co., and TSLA – Tesla Inc.

Economic Conditions

Over the last several years, U.S. car manufacturers have not made any upwards momentum in their stock price. This is somewhat surprising because cars were being sold at record breaking levels in 2015 and 2016. Plus, gas prices were falling which meant that consumers were willing to buy less fuel-efficient vehicles, such as trucks and SUV’s. These vehicles generally have a higher profit margin, but the stock prices did not reflect this higher demand.

There are a few reasons so many cars have been purchased lately. With cheap gas, and low interest rates, it made sense to purchase a car, if needed. However, this alone does not account for the record breaking numbers.

Since the financial crisis in 2008, many people have been driving their older cars longer. Consumers decided that they could use their old vehicles longer than they would have prior to the crisis. There are a couple underlying reasons behind this sentiment. One, the economy was still questionable. It is not a wise decision to make a purchase that is going to take several years to pay off, especially if you are unsure if you will have a job throughout the payback period. Two, cars have grown to become more reliable and longer lasting. When these two trends are coupled together it makes sense why consumers were less likely to purchase cars.

Eventually though, consumers decided they needed to replace their old cars, and seemingly all at once. The trend started in 2015, and continued through to the end of 2016. 2016 currently holds the record for most cars sold in a year with 17.55 million. However, this trend is not expected to continue. The 2017 estimates for vehicle sales is for more than 17 million, but there are some macro-economic factors that may continue to push car sales down. This may be why stock prices have not reflected the record breaking sales results.

Interest rates are still moving up by the Fed. As interest rates rise, it makes vehicle loans look less and less attractive. There is also the fact that so many cars have been leased. As cars comeback to the dealer, it is going to make new cars look less attractive because there will be more used cars available for sale. Used cars are generally better for car dealers. They  have a better profit margin, so there is more incentive to sell them. Lastly, auto-loans have been lengthening in time. The average loan is longer than 5 years now, and there are now loans offered for 72 months and 84 months. With such long lengths, these consumers will not be replacing their cars anytime soon.

General Motors

Starting in 2014 GM formed a Cup and Handle formation, and broke out early in September. Since the breakout, the stock has moved more than 19.5% and is currently sitting at $44.89. Even with this extraordinary move up, the stock is still sitting with a very attractive P/E ratio of 7.80.

A cup and handle pattern is formed when a stock creates a round bottom and a flat top (the blue curved line). After the stock forms the round bottom, it eventually moves back up towards the top of the “cup”, and completes it. Next, a handle is formed (the two straight blue lines). From here the stock breaks out and continues to move upwards. This is a great example of the formation.

From here, it looks like GM will continue to move upward, but at this rate, it may move quickly to another trading range. This is to say that the stock has moved up so quickly over the last month and a half, that it may reach a certain point where the “value” of the stock is reached and the stock cools off and begins another trading range, like it did from 2014 to 2017. It is also possible that this becomes a sustained trend, but we will need to see what happens.

F

Ford has recently broken a downward price channel (the two dashed red lines), and may be ripe for purchase. The PE Ratio is 12.76, which is still low considering the S&P 500 is sitting at 25.4. Although RSI and MACD showed positive divergences prior to the breakout, the lack of volume is suspect. The momentum indicators (RSI and MACD) look very good nonetheless, and this may be the beginning of a new uptrend, along with GM.

The stock did have a down day, and moved back to the top of the channel. If the stock can move significantly past the top of the resistance line, by at least 3%, then it may be a great time to enter a long position.

TSLA

Tesla was the first stock to break above its resistance line, where the uptrend started in February 2017. The stock has since moved into an ascending triangle pattern, with the resistance line at $390. The ascending triangle is an isosceles triangle formation, where the top of the triangle is flat, and there is an upwards line moving towards it. This pattern is generally considered to be bullish.

The P/E Ratio for Tesla is much different from the other two manufacturers; it is negative. This is because the company is considered more of a technology and growth company. Ford and General Motors have been around for more than a century, while Tesla is still in its infancy comparatively. Although the company is young, the technology and brand they are building may become a force in the years to come. Because of this, investors have pushed up the stocks valuation in hopes that the company does become a car company like Ford and General Motors.

It is also important to note that Tesla is not just a car manufacturer. They are in many aspects of electricity, including solar panels and batteries, now that the merger with SolarCity was approved. This company may be able to one day compare itself with the likes of GE – General Electric (ironic, right?), where it has its hands in many aspects of the economy, both at the business and consumer level.

Future Growth?

Overall, vehicles will still be playing a large role in the lives of consumers for years to come. General Motors and Ford represent the old manufacturers, while Tesla is paving the way to the future. This does not mean that the old companies will be leaving anytime soon. As new technology becomes available and new economies are built, they will likely be a part of it. Ford has begun to work with Lyft to build autonomous vehicles, where it is imagined that they will be able to pick up and drop off clients without a driver. Also, General Motors recently announced that it is ready to begin mass production of its own fleet of autonomous cars. These companies may represent the old economy, but they are quickly moving into the economy of the future.

Thanks for reading, and happy trading!

Submitted October 16, 2017 at 12:53AM by BR-Technicals http://ift.tt/2zcAfm8