Luxury car marque Aston Martin (LSE: AML) saw its shares roar ahead by 45% in November alone. That sort of jump often has investors salivating. Still well below half where they started 2020, many people will be wondering whether now is a good time to ride the momentum in Aston Martin shares.
I do think the shares could go higher from here. But despite that, I still wouldn’t invest in the company. Here’s why.
The road ahead is unclear for Aston Martin shares
I don’t think it is a coincidence that the company’s shares have jumped around so much this year. There is a lot of uncertainty about its business prospects. One issue is how well the market for luxury cars will hold up during a recession.
But a bigger question is about the company’s product lineup. It launched its first SUV this year. That has been a huge effort, with a costly new factory being built especially for this model. The company has said that the factory is running at full capacity, which is encouraging. However, while production is high, what matters is offtake – will customers buy the car? So far we don’t have a clear answer to that question.
An SUV is a big departure for the company. It has the potential to do well, which could explain the runup in the shares. But it could also underperform, or take time to reach its full potential. Meanwhile, the company continues to burn rather than create cash. That is not positive for shareholders, in my opinion.
The reality is that the company’s prospects are hard to gauge. The new SUV remains an unknown quantity for now.
Shareholders are last in line to benefit
Meanwhile, the company has tapped the debt markets and diluted shareholders heavily so far this year. That has bought it breathing space. But it has increased the company’s obligations to bondholders. Shareholders have been left with a smaller slice of the pie. They are also last in line when it comes to the company’s future financial obligations. The company recently issued £1.3bn in debt. So it’s hard to see the company paying out dividends any time soon, even if its new model is a big success.
In fact, Aston Martin shares provide a good reminder to me of the difference between a good business and a good investment. The iconic brand has been around for decades and I don’t expect it to disappear any time soon. It may even be that the business performs well. It is just that, with large debts and huge dilution of shareholders this year, I don’t think that the business performing well will necessarily mean that the shares perform well.
I view the recent Aston Martin share surge as a form of optimistic speculation. In my opinion, the possible reward for Aston Martin shareholders does not outweighs the risks. I would not buy Aston Martin shares but instead would look for a better choice.
christopherruane 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.