Lithia Motors Stock
To say we haven’t had any recovery in the automotive sector is a stretch. But as I have outlined previously, the fact of the matter is that any positive economic growth from cash for clunkers is the result of bringing tomorrow’s (the future’s) demand to today (this quarter). There’s no doubt about it, cars are hot right now, but who is to say they’re going to be hot when the government yanks cash for clunkers on Monday?
The good news is that the newly noticed auto sector is creating some prime opportunities to get in and short stocks. Many names, including Lithia Motors are prime for the shorting, both with cash for clunkers ending and the slack of demand that will exist over several quarters as those who haven’t yet taken advantage of C4C realize maybe their clunker isn’t so bad after all.
Earnings Effect
Earnings, unfortunately, send stocks higher even as the current climate may be sending them lower. I fully expect that when Lithia Motors (LAD) reports this quarter everyone will call it a huge success, even though the fundamentals after that look weak weak weak.
Lithia’s Explosion
A move to $2 to $14 is the sign of what we like to call a “high cost” operation, or one that even a relatively small change in the business cycle increases profits hands over fist because of its previously minute profitability. Case in point, a company that has revenue of $.40 per share, with $.38 in expenses cuts back on its expenses the next quarter to $.36 while producing the same $.40 in revenue. Magic! The company’s profit soared 100% on a 5% reduction in costs!
Getting ready to pounce
You don’t need to look much further than the explosion from $2 to $14 to call a short. Nor do you need to look at the RSI divergence on the daily chart, nor the long term trendlines standing in the way. Granted, this was a previously very profitable company, but we’ve already seen that the fundamentals of today are merely borrowing from tomorrow. That is, most people who traded in their clunker were more than likely going to buy a new car in the next few years anyway.
Auto Shorts a Dime a Dozen
Automotive shorts are a dime a dozen right now. Granted, they got a huge bump from this cash for clunkers nonsense, but there is still so much downside in these companies. The economy has yet to show a turnaround, investors have yet to dare send the major indices much higher, and the general sense is that we’re seeing a slowdown in the bad not an economy turning over.
