Editor’s note: This column is part of InvestorPlace.com’s Best Stocks for 2022 contest. Josh Enomoto’s pick for the contest is Sonic Automotive (NYSE:SAH) stock.
- A litany of bad news appears to have hit SAH stock, making it ruinous.
- However, the core fundamentals that made it a risky contrarian bet haven’t changed much.
- For speculators, it’s well worth keeping on your radar.
Russian President Vladimir Putin knows a thing or two about disruption. With inflation soaring to multi-decade highs, the last thing that I needed for my investment idea of Sonic Automotive (NYSE:SAH) was a war in Ukraine. But that’s exactly what Putin delivered, adding destabilization woes to SAH stock along with a triple serving of inflation.
Arriving at the second quarter of 2022, the auto retailer segment appears poised for a correction following a heady, unprecedented season of rising prices. With the national average price of gasoline hitting $4.14 per gallon, the concept of paying ridiculous premiums for both used and new cars seems, well, ridiculous.
In addition, the cratering of consumer sentiment would seem to bode very poorly for SAH stock. Since millions of Americans are still working from home either full time or part time, the incentive to go out and buy a car — especially a combustion-powered car — suddenly seems anachronistic. So, chalk this up as a loss, right?
I’m not going to sit here and state that circumstances are favorable for SAH stock. However, it’s also interesting to point out that global supply chains have yet to be resolved. In fact, the New York Times this past February stated that supply chain normalization is unlikely in 2022 and may not materialize until sometime longer.
Thus, while I’m wrong so far about SAH stock, used car prices (and just car prices in general) are still elevated. Let’s explore why.
SAH Stock is Still Painfully Relevant
Back in February, USA Today noted that it’s a bad time to buy a used car, though it’s a great time to sell one. That’s because “the consumer price index for used cars and trucks jumped up by 40.5% from January 2021 to January 2022.”
As writer Michelle Shen mentioned, “Bleak as the market is for used-car buyers, the computer chip shortage has also driven new-vehicle prices higher. The average new vehicle, Edmunds.com says, is edging toward $46,000.”
I don’t know what to tell you. It’s a double whammy. Used or new, it’s a hard pill to swallow as a buyer. But the cynical angle is that possibly — just possibly — you can buy SAH stock and benefit from the trend, just like you might pick up alcohol and tobacco stocks following a particularly stressful time (such as the coronavirus pandemic).
Now, one of the immediate counterarguments to this point is that regular folks don’t have to put up with these premiums. Just like with home prices, there’s going to be a mathematical limit to what consumers can afford.
However, I go back to my earlier point about Americans holding onto their vehicles for the longest time on record, with an average age of 12.1 years. Modern cars have become more reliable, thus allowing people to enjoy them longer.
But at some point, they break down. Depending on the cost-benefit profile, consumers just might have to pay up, which could possibly lift SAH stock.
What About the Transition to Electric Vehicles?
While you’re pondering the impact of the average age of cars on American roads, another counterargument to SAH stock will invariably arise: What about electric vehicles? With gas prices through the roof, these bad boys should experience significant demand.
I completely agree that with gas prices hitting close to $7 per gallon in my part of town, EVs are mighty attractive. However, like everything else in the new normal, you really had to get in before the wave to fully enjoy the benefits.
In other words, you’re not the only one to think EVs make sense when gas prices soar.
Indeed, Adam Smith’s invisible hand is a double-edged sword, guiding you to an alternative road and then simultaneously smacking you like, well, you know. In this case, if you thought a new car in the new normal was expensive at near $46,000, try a few bucks over $60,000 for a new EV.
Oh yes, Mr. Smith is no dummy. If something’s in demand, you can bet his invisible hand will jack up the price.
Plus, a lot of companies that are competing with Tesla (NASDAQ:TSLA) are suffering from the same semiconductor shortage that has disrupted everyone else. Therefore, no one has a real incentive to lower prices for in-demand vehicles.
Unfortunately on the consumer level, if you find yourself needing a car, you’re going to have to suck it up and buy what’s available. That’s a terrible positive for SAH stock.
If You’re Cynical, Nothing Much Has Changed
Initially, it seemed that the geopolitical flashpoint in Eastern Europe would unleash all kinds of perdition on the global markets. While it’s done that to many extents, for the auto retailer segment, nothing much has changed. People still need to buy cars yet prices remain elevated because of myriad setbacks and acute challenges.
To be fair, SAH stock has not capitalized on the problems, possibly because investors see an eventual end to the supply chain woes. But if circumstances continue to be squirrely, we might see a recovery in Sonic Automotive. Don’t go overboard but keep your eye on it — things could get interesting.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.