March 14, 2016 / 7:50 PM / 4 years ago

Early March gains in auto sector shares may prove fleeting

NEW YORK (Reuters) - Auto stocks have come roaring out of the gate in the last month, but the gains may be short-lived as analysts and investors show signs of souring on the sector.

New Ford vehicles are seen at a parking lot of the Ford factory in Sao Bernardo do Campo February 12, 2015. REUTERS/Paulo Whitaker

The sector has handily outperformed the 10 percent returns posted by the S&P 500 .SPX since the benchmark index hit a two-year closing low on Feb 11. Ford Motor Co (F.N) and General Motors Co (GM.N) are both up more than 15 percent since then, and Tesla Motors Inc (TSLA.O) has surged more than 40 percent.

The gains have been supported by a 7 percent year-over-year increase in auto sales in February, with sales reaching a 15-year high, helped by low gas prices.

But in a pessimistic sign, investors have been shorting the group - which also includes motorcycle maker Harley-Davidson (HOG.N) and recreational vehicle manufacturer Thor Industries (THO.N) - at the fastest pace of any sector in the Russell 1000, according to Fundstrat Global Advisors data.

Investors sell short on expectations that a stock will fall. In a short sale, shares are borrowed in the hope that they can be bought back at a cheaper price to pay off the loan, allowing the investor to pocket the difference.

“People are getting kind of jittery and thinking, How much more does this really have to run? How much more credit can people float? And when does the cycle start to turn?” said Nicholas Ghattas, research analyst at Fundstrat in New York.

Autos have been among the most downgraded industries by analysts in recent weeks, according to Fundstrat. The average recommendation for Ford, General Motors and Tesla has been trending toward a “hold” rating over the last 30 days, according to Thomson Reuters data.

Predictive analytics company Prevedere also suggests shares could be headed for a slowdown. Its leading indicator for the industry, which measures momentum, is currently hovering near its lowest level since 2012.

Andrew Duguay, senior economist at Prevedere, said with oil prices already so low, it is unlikely that future cuts in gasoline prices would continue to boost auto sales.

While the sector appears poised for a downturn, the traditional automakers may be the least susceptible. GM and Ford still are sensibly priced at roughly six times their estimated per-share earnings for the next 12 months, well below their own long-term average and the S&P’s 15.7 percent price/earnings multiple.

On the other hand, tech darling Tesla, at $116 a share, is priced at a whopping 98.5 times forward 12-month earnings. While the company has said it expects to report its first net profit by this year’s fourth quarter, analysts are more optimistic, with current forecasts calling for an adjusted profit of 10 cents a share in the second quarter and $1.32 for the full year.

Reporting by Chuck Mikolajczak; Editing by Leslie Adler

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