In the investing game, knowing which stocks not to buy is just as important as knowing which stocks you should own. Two sectors that I find particularly weak are the automotive sector and the aviation sector. These sectors face intense competition and low stock valuations. Two companies in particular are lagging behind S&P500 (SNPINDEX: ^GSPC) with a reasonable margin. They face significant hurdles in their operations that must be overcome before their stocks can compete with the broader market.
1.Ford
I love cars as much as anyone, but car companies aren’t always the best investments. Shares of Ford Motor Company (NYSE:F) have underperformed the S&P 500 by about 53% over the past five years.
It’s easy to fall into the value trap with stocks like Ford trading at less than thirteen times earnings. The problem is that cars have shares, with the exception of the wild ride Tesla (NASDAQ: TSLA), rarely see their earnings multiples rise above the high single to low double digits. That means they need to create remarkable financial growth for their stocks to post big gains.
The headache for Ford this year is electric vehicles (EVs). It reported a $1.3 billion loss on its EV sales in the first quarter of the year.
That’s right: Ford’s future of cars is in disarray. What’s worse is that the headaches will likely last for the rest of the year. Management said it expects $5 billion in losses this year, as measured by earnings before interest and taxes (EBIT) from its Model e cars, Ford’s EV line.
It’s not that Ford hasn’t created good growth. Turnover increased by 16% in 2022 and by 11.47% in 2023.
The problem is that investors do not want to forget the disastrous consequences of the 2008 financial crisis and the subsequent bankruptcy of several major car manufacturers. It has become clear over the past decade that investors have very little intention of paying large premiums for shares of major automakers. General engines (NYSE: GM) trades at less than six times earnings; Toyota (NYSE:TM) trades at less than 10 times earnings.
Investors just don’t seem comfortable paying high premiums for a sector so vulnerable to economic weakness. Whether it’s a traditional combustion engine or an electric car, most of us will be less eager to buy a new car if fuel consumption drops. Therefore, investors have a right to be cautious about auto stock valuations.
2. Spirit Airlines
To say that Spirit Airlines (NYSE: SAVE) to have had a tough year would be an understatement. Shares have fallen a painful 77% after the hoped-for merger with JetBlue (NASDAQ: JBLU) was blocked by regulators.
It was a pretty devastating blow to a company that has been losing money for several quarters. Travel has recovered from the worst of the pandemic, but Spirit’s performance has not.
The budget airline has lost hundreds of millions of dollars annually since 2020, despite pretty decent revenue numbers. Collectively, Spirit has lost $1.9 billion over the past four years, and 2024 will also be disappointing.
The first quarter got off to a rocky start, with operating revenues down 6.2% year over year and operating losses increasing 84.5% to $207.3 million. Spirit expects continued losses for the second quarter. To make matters worse, the airline expects to have around 70 aircraft out of service by 2025, which will cause further operating cost problems.
Simply put, Spirit was too dependent on a buyout. It seems pretty clear that the airline will make it on its own. Now that JetBlue is out of the running and Spirit has racked up some pretty significant debt that it will have to pay back, the risk is simply too great to gamble on this.
Should You Invest $1,000 in Ford Motor Company Now?
Consider the following before purchasing stock in Ford Motor Company:
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David Butler has no position in any of the stocks mentioned. The Motley Fool holds and recommends positions in Tesla. The Motley Fool recommends General Motors and recommends the following options: In January 2025, $25 would appeal to General Motors. The Motley Fool has a disclosure policy.
2 Stocks to Avoid in 2024 was originally published by The Motley Fool
