Automotive shares are cyclical as they usually advance or decline with the broader economy. And according to The Society of Motor Manufacturers and Traders (SMMT), the carmakers’ trade body, UK new car sales were down 89% in May as the stay-at-home economy hit car sales.
Yet as of 1 June, car showrooms, as well as many other businesses, in England reopened. In recent weeks, optimism understandably had a positive effect on broader equity markets as well as the Aston Martin (LSE: AML) stock price, despite last week’s dips. Therefore, today I’d like to discuss whether you should consider adding car stocks like AML to your long-term portfolio.
Sought after luxury brand
FTSE 250 member Aston Martin had its initial public offering (IPO) in October 2018. But the luxury carmaker’s stock market debut has been disappointing as the share price has been in steady decline ever since — that is, until the past four weeks.
In mid-May the high-end sports car manufacturer released disappointing Q1 results. Analysts raised eyebrows as the group reported declining sales and ballooning losses. Sales in China were extremely disappointing, down 86% year-on-year. Management also pulled full-year guidance.
Following the trading update, AML shares hit an all-time low 27.5p. But then investors started flocking to the stock. Many think the new CEO Tobias Mober, ex-chief executive of Mercedes-AMG (the performance arm of Daimler), can drive a turnaround. As I write, the share are hovering at 71p. Put another way, if you had been brave enough to invest £1,000 in Aston Martin a month ago, your investment would now be worth over £2,500.
So would I invest in Aston Martin stock now? It’s both a car company and a luxury brand. Therefore, its fortunes are tied to the economy not only domestically, but also in markets like China. But I do think a turnaround is possible. So I’d wait for a pullback in the share price, possibly towards 60p or even lower before I’d buy. Aston Martin is a sought-after luxury brand. I’d buy the dips.
Other car industry shares
The car industry is a large part of our economy. Britain’s leading stock index, the FTSE 100, offers several possibilities for investors to consider. Many of our readers will be familiar with Auto Trader, which operates the UK’s largest digital automotive marketplace. The group specialises in both second-hand and new car sales, including those sold by private sellers and trade dealers.
The law says that you must normally have at least third-party motor insurance if you drive or own a vehicle. And that is why insurers, such as Admiral Group, Aviva, and Legal & General could be the next group of stocks to consider.
Melrose Industries, another FTSE 100 member, specialises in acquiring and improving underperforming businesses. It owns GKN Automotive, which delivers mass production solutions for mobility.
FTSE 250 and AIM stocks
Investors can also find several other companies that are FTSE 250 or AIM-listed. AIM is the London Stock Exchange’s market for smaller companies.
National car dealerships and retailers, such as Cambria Automobiles, Lookers, Marshall Motor Holdings, Pendragon, and Vertu Motors offer another way to invest in the industry.
Finally, are you instead looking for global automotive distribution, retail, and services companies with UK headquarters? Then Inchcape may well fit the bill. It generates over two-thirds of its operating profit from emerging markets.
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tezcang has no position in any of the shares mentioned. The Motley Fool UK owns shares of Cambria Automobiles. The Motley Fool UK has recommended Admiral Group, Auto Trader, Pendragon, and Vertu Motors. 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.