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I’m avoiding this car stock after a half-year loss

Aston Martin (LSE: AML) released its half-year results on July 31, and the reaction from the market is telling. Shares of the luxury car manufacturer were down as much as 20% in early morning trading. Why? The company reported a significant loss in the first half of the year.

The macro trends for the broader luxury market were troubling at the beginning of the year. Stock market turbulence in the final months of 2018 throttled luxury brand equities. The threat of a global slowdown had many investors heading for the exits. But there has been a marked improvement in the first half of 2019, mostly due to rising demand in China and the US. Unfortunately, the luxury car sector has succumbed to worsening economic conditions in the UK and Europe.

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In January, UK car sales suffered the biggest drop since the financial crisis. Uncertainty surrounding Brexit has weighed on the industry since the referendum. Car-makers continue to warn that a no-deal Brexit would seriously threaten production and obliterate investor confidence. The Society of Motor Manufacturers and Traders (SMMT) recently said that investment in the UK industry fell by more than 70% in H1.

A bumpy road ahead

Aston Martin stock had already suffered a sharp drop in the previous week after the company slashed its profitability forecasts due to declining sales. Global headwinds have converged to upend what has been, until now, an impressive turnaround story. Just last February, Aston Martin had posted its first profit in nearly a decade. This sparked momentum for the stock that it had not seen since its return to the market in the autumn of 2018.

But a dampening outlook for the UK and European economy has soured the comeback story. In the first half of 2019m Aston Martin confirmed a pre-tax loss of £78.8m compared to a profit of £20.8m in the same period in 2018. Strong demand in the US and China managed to offset slumping sales in the UK and Europe, but not enough to rescue a disappointing earnings report.

The stock has now shed over 70% of its value since its October 2018 float. The company has reduced its profit margin projections to 8%, down from its previous forecasts of 13%. Aston Martin has slashed its wholesale guidance for the full year too and confidence in the car sector is unlikely to shift in a positive direction until investors are given more clarity on Brexit.

The relative strength index (RSI) aims to chart the current and historical strength or weakness of a given stock. Aston Martin stock was pushed to an RSI below 20 immediately following this earnings report. That puts the shares in technically oversold territory. Sometimes this can serve as a solid buy signal, but I’m remaining on the sidelines. At this stage there are simply too many obstacles for me to put my faith in the stock. In fact, I’m avoiding the car sector entirely in the second half of 2019.

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Ambrose has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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