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Stock Watch: The Auto Industry

Living off-campus for the first time as a junior presents many challenges.  Perhaps the biggest will be the agonizing 20-minute walk to middle campus for classes every day.  As I stroll through the beautiful backroads that surround BC, I let my mind wander onto the important things of life, like which car company would be the best play in the long term.  But before we enter into that, here’s a quick recap of how our stock are doing so far: while the market has gained .5%, Facebook is up 16%, Sam Adams is up 15.5% and Dunkin Donuts is up 9%.  The sell recommendation on Apple is also looking good, with it down 1.5%.  Not too shabby. Nevertheless, onto the new picks in the auto industry.

Tesla (TSLA):

1372765_10151598395551883_1528245677_nIf you are from the East Coast, you may not know about the new car craze that is sweeping across California.  Tesla’s brand of electric cars have been on a tear this year with the stock up around 400% YTD.  Pretty large profits for a company that’s is actually losing money, giving it a P/E of around 250.  Tesla’s mostly trading on expectations that it is the next big thing in cars with its sleek design of energy-efficient cars and that the CEO, Elon Musk, is the next Steve Jobs.  While the innovation this company brings is impressive, I think it is extremely overbought.  The products are too expensive for the general public and electric cars are still a niche market (have you ever seen a Tesla car?).  At a stock price topping 170, this niche product is years ahead of the company.  While investors have tried to call the top of this stock since it broke 80, I think the electric car craze is dying down.

Recommendation: Sell. This would be a good short play if it bounces up again.

Ford (F):

1370237_10151598395666883_1234431751_nA lot of people have been down on the car market in recent years, and for good reason.  Many American car companies took bailout money and people have not been buying cars (especially younger people).  Nevertheless, I think that Ford has a lot of growth as a longer term buy.  If we look at the P/E its relatively cheap now, at around 11.  As we continue to grow out of this recession, people are slowly going to make those bigger purchases that they have been holding off on.  The average car’s age in the US is at a record high of 11.4 years.  As people get the money to replace those aging cars, look for the Auto sector to get a bounce in the next few years.  Along with this thesis of the overall economic improvement comes with the reason I like Ford specifically.  As the housing market comes back out of the darkness of 2008-’09, contractors are looking for reliable, eco-friendly, American cars, which Ford can provide over the coming years. Ford can be a more volatile play, but the long term prospects look good.

Recommendation: good long term buy

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