Why U.S. Car Companies Are Losing

In an article published Thursday on Zero Hedge, one of its top authors explained, in one simple chart, why U.S. automaker stocks have been dramatically underperforming the market for more than 2 years now.

While auto sales were rising on the back of easy credit, automakers’ stocks were not doing so well. Since the end of 2013, they have underperformed the market by a wide margin. For instance, between January 3, 2014, and March 10, 2016, shares of Ford Motor Company F have lost 14 percent, while the S&P 500 gained more than 9.25 percent. Similar was the case for General Motors Company GM, which tumbled almost 25 percent over the same time period.

So, what happened?

According to the aforementioned article, “the reason for the underperformance is simple - stock investors discount the future and with a mal-investment-driven excess inventory-to-sales at levels only seen once before in 24 years, they know what is coming next.”

Source: Zero Hedge

To make things worse, used car prices saw the biggest February drop since 2008, putting pressure on new car prices.

Even further, lease levels in the U.S. are considerably high. This means “there's no end in sight to the off-leases and thus no way to determine, at this juncture, how big the residual writedown wave and deflationary auto industry calamity will ultimately end up being,” the note expounded. So, brace yourselves, Zero Hedge advised.

Bottom Line

Even in spite of the easy access to credit, automakers’ pricing power is pretty low right now, especially as the factors mentioned above force them to “halt production and dump inventories in a vicious deflationary cycle...”

Disclosure: Javier Hasse holds no positions in any of the securities mentioned above.