Which Auto Manufacturing Investment is the Best Drive?
Is it Tesla, GM, Ford, Toyota, or Honda? Is it one I did not mention? Cindie and I have owned products from four of the five. I also owned a VW Beetle, and an AMC Gremlin back in the 1970’s. Our last four new cars were all Ford Escapes. But that doesn’t mean Ford is the best investment.
I do think the Ford Escape is a quality product at a reasonable cost per mile. If you drive one of these five brands, or one I did not mention, you probably feel the same way about the car, minivan, truck, or SUV you drive. But liking a product does not mean you need to like the investment. If you are to think like an investor, thinking like a consumer helps, but it isn’t the only thing you should consider.
Thinking Investors Comparison Shop Ratings
For example, I often gain insights from Fidelity Investments, Seeking Alpha, StockRover, and even Weiss Ratings. These help to narrow the risk to the best of breed investments. But this can also be overwhelming to a new investor. It is best to pick just one source. If I had to recommend only one, it would be Seeking Alpha.
The above images show comparisons of TSLA, F, GM, TM, and HMC from the three best sources I use. Based on these ratings, I would lean towards Ford as a value stock investment and Tesla as a growth stock investment.
Buying an iPhone or an Electric Vehicle
Most of the adult population in the US can afford to buy a smartphone. Of course, for many that means taking a financing approach that will eat away at the family budget for five or more years. But that is somewhat invisible in the thinking of most consumers. Cindie and I don’t like financing depreciating assets, so we pay cash for iPhones, furniture, and new cars. A rule of thumb is to pay cash for anything that depreciates in value.
Thinking Investors Think About Financing Costs
When the cost of a product goes up, the number of potential buyers goes down. For example, many can afford to buy the iPhone. Replacing the iPhone every couple of years could be within the reach of most working and retired adults. The financing costs are usually invisible to the buyers. But the costs of financing a vehicle are a different story. Now the choice becomes “what can I afford” and “new versus used” because of costs.
Thinking Investors Consider Median Income
Larger purchases limit the pool of buyers. The cost of buying or financing a home or a fancy vehicle are not invisible to most thinking adults. Consumers tend to hang on to their vehicles for a longer period of time, especially if they are making payments. Furthermore, the cost of replacing a vehicle every couple of years would stretch most budgets. When thinking about a market for a product, it helps to know the median income of the citizens. In 2022, the median income was $70K. That might seem like a lot, but it isn’t when considering the cost of a new or gently used vehicle.
This consideration should be part of your investment thinking. If the market becomes saturated, the costs of the vehicles may come down, but the profit margins will as well.
Growth or Value Stocks
I personally like Ford as a value investment. While the dividend can be suspended or reduced, I not only like Ford’s products and services, I like the opportunity that Ford shares provide. I think Ford management has made good long-term decisions about their business.
Tesla is an interesting growth investment, and I have two open put option contracts on TSLA shares. The main problems I have with TSLA are that the P/E ratio is a bit rich and they have had to reduce prices on their vehicles. This will impact their margin. Why did they significantly reduce their prices? Two words come to mind: demand and competition. The demand for electric vehicles is waning and increasing competition from Ford is making Tesla nervous.
Let it be understood that I will happily own the Tesla shares if they get assigned to me on Friday. However, I will immediately sell covered call options on my shares. In other words, I will use the wheel options strategy I talked about in a previous post about my 2023 options strategy.
Thinking Investors Buy What They Know
Although you should not buy an investment just because you like the service or product provided by the company, it should be a part of your buying decision. For example, if you don’t understand the nature of a REIT or a Business Development Company (BDC), you should not buy shares in those companies.
Summary
When considering an investment, think “supply and demand.” Think about the median income of consumers. Don’t forget that there are some fundamentals about a business and competition that must be part of thinking like an investor.
Know Your Flocks & Herds 