Volkswagen Emissions Scandal Putting Pressure On Auto Stocks

Volkswagen hasn’t only dug a grave for itself via the emissions charade that it pulled off on regulatory authorities thanks to sophisticated software that helped it to fake testing results (although its own grave might be considerably deeper), but also for other automobile companies including Ford Motor Company (NYSE:F), General Motors Company (NYSE:GM), and Fiat Chrysler Automobiles NV (NYSE:FCAU), which were again under fire today in the early hours of trading. Ford was down by 2.2%, GM by 2.03%, and Fiat Chrysler by 5.63%. We’ll analyze the implications the scandal could have on auto stocks and the hedge fund sentiment concerning these stocks in this article.

Most investors don’t understand hedge funds and indicators that are based on hedge funds’ activities. They ignore hedge funds because of their recent poor performance in the bull market. Our research indicates that hedge funds underperformed because they aren’t 100% long. Hedge fund fees are also very large compared to the returns generated and they reduce the net returns experienced by investors. We uncovered that hedge funds’ long positions actually outperformed the market. For instance the 15 most popular small-cap stocks among funds beat the S&P 500 Index by more than 60 percentage points since the end of August 2012. These stocks returned a cumulative of 118% vs. a 57.6% gain for the S&P 500 Index (read the details). That’s why we believe investors should pay attention to what hedge funds are buying (rather than what their net returns are).

Ford Motor Company (NYSE:F) had a fantastic August as its U.S sales for the month rose to their highest level in nine years, with new vehicles like the Ford Edge and Ford Explorer contributing strongly to this uptrend. Moreover, the company registered a 12% rise in European sales, making it the top commercial vehicle seller in the region for both the month and year-to-date. It looks like Goldman Sachs had it right when it upgraded the company in June of this year.

Among over 700 hedge funds that we track, the interest in the company rose during the second quarter as a total of 36 firms had an aggregate investment of $754.96 million in Ford Motor Company (NYSE:F) at the end of June compared to 33 funds with a total of $832.07 million in shares at the end of March. The stock price depreciated by about 5.78% during the second trimester, adding to the 13.23% decline on a year-to-date basis. The aggregate hedge fund holdings on June 30 amounted to merely 1.3% of the automobile manufacturer’s outstanding shares. Richard S. Pzena‘s Pzena Investment Management, the largest Ford stockholder within our database, increased its holding in the company by 1% to 17.72 million shares valued at $265.98 million during the second quarter.

Not too long ago General Motors Company (NYSE:GM) was embroiled in its own mess similar to Volkswagon, though different in many ways. After all, the company’s faulty ignition switches weren’t a deliberate attempt to deceive regulatory authorities, but the debacle did come with hefty costs and a tarnished reputation. General Motors’ retail sales increase in the U.S for the month of August was the largest in the industry at 6%, which resulted in a 1% gain in market share as well. GM’s stock price has slid by more than 7% in the last five trading days however.

At the end of June a total of 104 hedgies had investments worth $578.35 million in General Motors Company (NYSE:GM), amassing about 10.9% of the company’s common shares. While this represented an addition of one to the total number of investors, the aggregate investment fell from $674.18 million in holdings at the end of March on the heels of about a 10% depreciation in the stock during the second quarter. Legendary investor Warren Buffett‘s holding company Berkshire Hathaway is the largest stockholder of General Motors in this list of investors, owning about 41.0 million shares valued at $1.37 billion. In second place is David Tepper’s Appaloosa Management, which surged its stake by 23% during the second quarter to hold about 18.80 million shares.

Fiat Chrysler Automobiles NV (NYSE:FCAU)’s stock has slumped by more than 14% in the last five trading days and the positive karma it established by reaching a tentative deal with the United Auto Workers seems to be completely lost. The company is now trading at a favorable forward earnings multiple of 8.87 and Morgan Stanley recently resumed its coverage on the company with an ‘Overweight’ rating. Rob Citrone’s Discovery Capital Management increased its stake in Fiat Chrysler Automobiles NV (NYSE:FCAU) by about 34% during the second trimester to nearly 5.13 million shares valued at $74.47 million.

Disclosure: None