As investors, we’re always looking for the best return on our investment.
Sometimes that means looking for stocks with value, and sometimes that means looking for stocks with big growth potential.
But, when the stock market takes a downward turn — just like now as markets fall thanks to the coronavirus pandemic — it opens a whole new door for us: cheap stocks.
We often get tempted to look for stocks that are dirt cheap — in this case, buying the dip in the share price.
Our belief is that these companies are cheap because the market is making them so. The hope is that they rebound nicely, offering us a tidy profit because we bought them so low.
But, in some cases, that’s what’s known as a “bull trap.”
There are cheap stocks out there that are cheap for reasons other than just because the market is down. It’s because the sector they are in is suffering from headwinds that put pressure on their sales or production, making them a bull trap for overeager buyers.
One sector is facing those headwinds, which is pushing stocks to cheap levels, but now is not the time to buy.
Bull Trap Stocks: Decline in Sales Pressure Auto Sector
And that drop in sales has had a trickle-down effect, impacting production.
Here’s what he found:
- China’s car sales fell to just 224,000 in February 2020. That’s the fewest cars sold in a month since 2005.
- New car sales plunged by 42% compared with the same period last year (year over year). That’s the largest recorded decline in more than 30 years.
- In April, just 4,321 cars sold in Great Britain, a 97% decrease year over year. That’s the slowest month since just after World War II.
- Last month, France’s auto sales plummeted 89%from April 2019.
- In South Africa, new car sales sank to 574 in April, a 98% fall from the 36,787 sold a year ago.
“In the U.S., that’s worse than we saw in the Great Recession. Compared with the same period in 2008, car sales decreased by 38% in January 2009,” Badiali, Editor of Real Wealth Strategist said. “This is a global issue. That means the big carmakers can’t count on sales from one region to offset declines in another. It’s a huge problem that’s not over yet.”
That makes these stocks a bull trap.
Avoid This Cheap Stock Trap Now
American auto giant Ford Co. (NYSE: F) relied heavily on rental agencies and non-fleet buyers in the latter stage of 2019.
But that well has dried up as travel bans have hammered the demand for rental cars.
Additionally, the massive drop in oil prices from January 2020 to April 2020 took its toll on car rental companies.
Now, rental car company Hertz Global Holdings Inc. (NYSE: HTZ) is facing financial disaster.
Since reaching more than $19 a share in February, Hertz shares have tanked by more than 84%. You may think this is a great time to buy, but it’s a bull trap.
“This is the second-largest car rental company in the U.S. It had about 567,600 vehicles in its fleet,” Badiali said. “Some of those will have to go to service the $18.6 billion in debt on the books.”
There’s One More ‘Bull Trap’
As I said before, Ford counted nearly a third of its auto sales to car rental companies in the fourth quarter of 2019.
It’s Q1 2020 earnings report was pretty bad.
The company recorded minus-$2.3 billion in free cash flow along with a nearly $6 billion decline in revenue.
Its share price has fallen more than 40% since February 2020 to dirt-cheap levels.
“While the share price is down 60% from its 2019 high, it will get worse before it gets better,” Badiali said. “And Ford isn’t alone. The entire auto industry is in deep trouble.”
Badiali went so far as to call cheap stocks like Ford and Hertz “bull traps” because on the surface, their low price makes them tempting for investors to get into. However, he said a second bottom will likely push these companies even lower.
“Don’t fall for the trap,” Badiali said. “For now, avoid the big automakers like Ford and car rental companies such as Hertz. There’s more pain to come before we can make big gains.”
Pro tip: Growth stocks are blasting value stocks. Check out our report and see how you can pad your portfolio for gains.