“Price is what you pay; value is what you get.” —Ben Graham
“Every decade or so, dark clouds will fill the economic skies, and they will briefly rain gold.” —Warren Buffett
The world has been turned upside down by the Covid19 pandemic and the financial markets do not seem to care. The stock market is defying gravity with the help of unprecedented government stimulus. Major market indices are making a stunning rebound even as Covid19 continues to spread and total deaths in the United States climb above 75,000. In many key industries, uncertainty around earnings remains very high. Nobody knows with any accuracy what airlines will earn in 2021 and beyond. Will people fly as often as they did pre-Covid19? Will business travel suffer in the long term? What about the hotel and hospitality sectors? What about commercial real estate? Will people continue to ride-share in an Uber or Lyft car? The energy industry is in turmoil with futures contracts in oil turning negative—yes negative! We do not know how many human habits will permanently change as a result of Covid19. Working from home, using video conferencing, and shopping for groceries online have suddenly become the new normal. (Featured image courtesy of Forbes).
The chaos of Covid19 has greatly impacted the automotive industry. Factories across the globe are shuttered and dealership sales have slowed to a trickle. Meanwhile, the automotive industry continues to experience its own ongoing Creative Destruction. For years we have written about electrification, ride-hailing, and autonomous driving and how these trends are upending the industry. But today, valuations of automobile companies have never been more telling—and confusing. The market loves electric cars and fast Italian exotics and eschews the F-150 pick-up truck. Consider the following numbers:
- Ford is worth $19.37 billion
- Ferrari is worth $29.62 billion
- General Motors is worth $32.14 billion
- Tesla is worth $144 billion!!!!
Could Enzo Ferrari ever have imagined that his tiny company would one day be worth more than the Ford Goliath? Did the once invincible General Motors ever think that an upstart California-based electric car company run by a rogue outlaw would be worth over four times their market capitalization? These are indeed interesting times!
Back in February of 2016 we noted that Ferrari stock was trading at $31, down from its $52 IPO price. At that time, Barron’s noted, ““Now, at a price/earnings ratio of 18 times analysts’ consensus EPS estimate of $1.86 this year, the stock is more reasonably valued, but its outlook is cloudier.” We indicated that the stock was interesting at $35 to $40 per share—if only we really knew how interesting it was back in early 2016!
Maybe the best thing we can do here is to reflect and learn from the wisdom of Warren Buffett’s timeless 2000 investor letter which said, “At Berkshire, we make no attempt to pick the few winners that will emerge from an ocean of unproven enterprises. We’re not smart enough to do that, and we know it. Instead, we try to apply Aesop’s 2,600-year-old equation to opportunities in which we have reasonable confidence as to how many birds are in the bush and when they will emerge (a formulation that my grandsons would probably update to ‘A girl in a convertible is worth five in the phonebook.'”