Car stocks have been stuck in a ditch, even as U.S. auto sales rise and cyclical sectors like airlines and homebuilders have outperformed. But after two stagnant years for the shares, some investors say it's finally time to think about buying GM and Ford.
The first thing most Ford and GM bulls point to is the rock-bottom valuations. Ford is trading at a forward price-to-earnings ratio of 8, while GM is even cheaper at 6.5. That makes GM the fourth-least-expensive stock in the S&P 500, in terms of the earnings that analysts expect the company to report over the next year.
But cheap valuations don't come cheap.
Concerns around the car stocks are copious, with trouble in China serving as the biggest dark cloud over the sector.
In July, GM reported that retail vehicle sales slid in every region besides North America in the second quarter versus the year-ago period. By far the biggest worry is China, where GM is the market leader, and from which GM derives more than a third of its net income, according to Barclays. With that massive economy already weakening, concerns about a rapid Chinese deceleration weigh heavily on the stock.
"Investors are very fearful, and very, very negative on the Chinese auto market," commented Charles DyReyes, senior research analyst for large-cap strategies at Brandywine Global, where GM is a top holding in multiple portfolios. "We definitely think there's something to worry about, but it's not like the earnings power of this company will drop to zero. Bears were calling for an implosion earlier this year, and that still hasn't happened."
In fact, the company still managed to earn a pretax profit in China in the second quarter despite the weakness.
"It seems like the market is predisposed to always be too pessimistic on GM," DyReyes continued in a phone interview. "But at seven times earnings, the market is discounting a hell of a lot of negatives in the stock. If some of those things don't happen or simply aren't as bad as the market fears, we think we can make money in GM."
DyReyes also has a positive view of Ford, though he prefers GM because of its lower earnings multiple.