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In the stock market, or any traded market for that matter, “opportunity” can be a dangerous concept. When you think you see it, it is because you believe that something is mispriced, which for most investors means a stock that is cheaper than it should be. Very early in my market career, though, I was taught to be careful of that. As my first boss was fond of saying, markets cannot be “wrong” per se. After all, who is more likely to be wrong: thousands of educated and informed traders whose collective wisdom results in the price of something, or you?
There are a few ways, though, that both the market’s current pricing and your dissenting view of the future can be right simultaneously, and when that is the case, there is real opportunity. That seems to be true right now with the stock of the big auto manufacturers, and General Motors (GM) in particular.
The conventional wisdom keeping car stocks depressed is hard to argue with. For starters, interest rates are climbing, which should dampen car demand significantly, given that buying a car involves taking out a loan for the vast majority of people. Then there is the fact that auto manufacturers have typically made their money off of cars driven by internal combustion engines, and the EV revolution is coming and coming fast. That seems to create a demand-suppressing environment in both the short and long term for companies like GM.
However, that analysis ignores a couple of things. The traditional car companies are not sitting back and watching the EV revolution, they are actively participating in it. Tesla (TSLA) may have a dominant position in the market right now, but the flurry of recent price cuts on Tesla models points to an emerging situation, that the “big boys” of auto manufacturing are getting up to speed, albeit slowly, and competition is increasing. I actually believe that the market for electric vehicles has enough growth potential for everyone to benefit, but there may be some hiccups along the way, and the larger companies may be better positioned to deal with that than most.
It might turn out, for example, that the lithium-ion batteries that Tesla, Rivian (RIVN), Lucid (LCID) and just about every EV company are committed to are overtaken by other technologies. Could sodium-ion batteries prove to be a better bet given the supply dynamics of sodium as opposed to lithium? Or how about fuel cells powered by hydrogen? The resources being sunk into lithium-ion power make a shift to another power source seem unlikely, but things like the Chilean government’s decision to involve the government in the mining and sale of lithium increases the chances of the auto industry looking for alternatives. If that does happen, the big, established firms, who already have their fingers in other pies, will have an advantage.
That is a very long-term potential advantage, but there is a short-term one, too. The potential for EVs comes from the fact that only around 7% of cars sold are EVs, but that also means that right now, 93% are gas powered. The future for the dominant makers of traditional vehicles like Ford (F) and GM may be uncertain in some ways, but they will still have solid business for the next decade or so.
That was reflected in the Q1 earnings report of GM that was released this morning. It was a doozy, with EPS of $2.21 smashing estimates for $1.58 on higher-than-expected revenue. Good enough, in fact, that the normally quite cautious CEO, Mary Barra, increased guidance for the full year 2023. And yet the stock, after an initial pop, pushed lower in early trading.
Traders, it seems, are still stuck on the long-term “problems” for GM, problems that may or may not materialize. GM, meanwhile, is making money in the short term, money that can be invested to speed up and expand the company’s own EV program, including some protection against the possibility of non-lithium power sources coming to dominate the market.
That looks to me like a situation where the market is, if not wrong, maybe wrongly focused on some unclearly defined gray area where problems might possibly arise, without allowing for the advantages that accrue with the sheer size of an operation like GM’s. This is a time when, despite my reluctance to say it, I feel like the market is wrong, and that makes GM a solid buy for investors at current prices.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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