Thursday Tariffs

Good morning contrarians! Welcome to the Daily Contrarian, our morning look at events likely to move markets. It is Thursday, March 27. Today’s Stocks On The Contrarian Radar©️ segment features automakers, especially STLA 0.00%↑, and starts at the bottom of this page.

State of Play

Stocks sold off again yesterday, reversing most of the week’s gains especially in tech land. It was not all bad however as consumer staples stocks gained ground. As we eye our board of indicators for signs of direction at 0710, things appear mixed:

• Stock index futures are flat, with no major US index moving more than 0.2% from the break-even point;

• Bonds are selling off, interestingly enough. The 10-year yield is up 6 basis points to 4.40% (yields move inversely to prices);

• Commodities are taking a breather for a change. Industrial commodities, that is. WTI crude oil is unchanged at $69.50/barrel. Copper also unchanged. Gold and silver are gaining ground however, both up 1%;

• Cryptos aren’t doing much with Bitcoin down <1% to trade around $87,300.

Today’s Known Events

It’s another quiet day. We do have some earnings however:

• Winnebago Industries (WGO 0.00%↑) beat estimates and appears to have raised guidance as the stock is up 3.5% in the pre-market;

• Lululemon (LULU 0.00%↑) is due after the close.

In terms of economic data we do have initial jobless claims at 0830 seeing how it’s Thursday. Economists who were surveyed expect 225,000 new claims, up a bit over last week’s 223k but still below the four-week average of 227k.

Pending home sales are out at 1000. The expectation here is for a month-over-month increase of 0.9% after a decline of 4.6% last month.

The Bottom Line

Tariffs appear to be the story again. President Trump last night announced a 25% levy on US car imports. This was widely expected and indeed appears to have been the cause for yesterday’s sell-off. Tech has other issues to deal with as well, with Microsoft (MSFT 0.00%↑ ) reportedly abandoning data center projects.

All of a sudden this makes the set-up look pretty bearish. It also makes Monday’s rally look like a bit of a dead-cat bounce. But the fact that staples and energy stocks have rallied through this tells us investors are not willing to throw the baby out with the bathwater quite yet. They have simply soured on the tech sector.

Don’t fight the tape. The Contrarian is holding on to his tech investments even though some of them are under water. He is happy to have a large allotment to staples and happier still to see dollar stores rallying. He is not looking to add to any positions at these prices, other than an occasional purchase of Nuveen New York AMT - Free Quality Municipal Income Fund (NRK 0.00%↑) for tax free income, and maybe just maybe a beleaguered automaker if it’s on sale?

Stocks On The Contrarian Radar©️

One does have to look at automakers. For one, just to observe the damage. The biggest are Ford (F 0.00%↑), General Motors (GM 0.00%↑), Tesla (TSLA 0.00%↑), Toyota (TM 0.00%↑), Volkswagen (VWAGY), Rivian (RIVN 0.00%↑) and Stellantis (STLA 0.00%↑). There’s an ETF, Max Auto Industry 3X Leveraged ETN (CARU 0.00%↑) that we can use as a proxy for the entire industry, though it isn’t limited to automakers but also things like Carvana (CVNA 0.00%↑), its largest holding, and AutoZone (AZO 0.00%↑).

Here’s the overnight damage:

• Tesla: +0.9%

• Rivian: +0.25%

• VW: -0.7%

• Stellantis -1.4%

• Toyota -1.7%

• Ford -3%

• GM -6.5%

Quite a mixed bag, with the move in US electric vehicle manufacturers perhaps an indication that investors are already dipping their toes back in.

For the longer-term view, let’s just take the largest automaker, Toyota, the largest US brand, Ford, and Stellantis to get the European aspect, and hold them up against the CARU ETF. As you can see, Ford is the only one still up so far this year:

Zoom out a bit, to the trailing 12-month chart, and the picture changes. The ETF has actually held on to gains while the others have gotten beaten up:

WTF is going on with Stellantis? It may be in part due to the generous dividend, worth 10% at current prices.

Looking at the valuation, STLA trades at:

• 4x forward earnings

• 0.2x forward sales

• 1.9x forward cash flows

That is literally screaming cheap AF. Turning to the balance sheet, one quickly understands why. The company has $38 billion in debt versus $35 billion market cap. Of its $84 billion in assets, $16 billion are in goodwill with $20 billion in ‘other intangibles.’ That means $36 billion of its $84 billion in assets, more than 40%, effectively doesn’t exist.

So yeah, that dividend is probably not long for the world. But could the stock be worth a punt at these prices? The company’s auto brands include names like Alfa Romeo, Chrysler, Citroen, Dodge, Fiat, Jeep, Maserati, Ram, Opel, and Peugeot. Those are some very well known names, including several in the lucrative US market. The crown jewel, of course, is Maserati. One need only look at Ferrari (RACE 0.00%↑) to see the potential for ultra high end cars. Here’s the five-year chart of RACE, STLA, and the S&P 500 (SPY 0.00%↑).

You’ll note the divergence in July when STLA clearly separated from the others. One has to wonder if this gap will start to narrow at any point?

Clearly more research is required, but maybe just maybe it’s worth taking a punt on Stellantis. Yeah automakers are cyclical but this thing has gotten beaten up so badly it’s kind of hard to justify the price even with tariffs. Even if most of its auto brands are junk, especially in the age of electric vehicles, some like Jeep have loyal brand followings. Alfa Romeo has cachet. Even Opel’s name carries weight in German-speaking Europe.

The Verdict

The Contrarian is intrigued about the possibility of Stellantis and will look into possibly taking a small position if it drops further. The understanding is that this is a speculative punt and maybe a call option on Maserati getting spun out.

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