Topic: How To Invest

What is Pat’s commentary for the week of December 11, 2018

Article Excerpt

Recently some Inner Circle members have asked why the price/earnings ratios, or P/Es, of automakers, such as Ford Motor Co., are as low as they are today. They wonder if these low P/Es represent a warning sign, or a buying opportunity. There’s no simple answer to that question. A lot of things now going on in the economy can have a big impact on automakers stocks in the next couple of years, for better or worse. So, I asked our research department to prepare a special report on the subject. Here it is: Investors see carmakers as highly cyclical businesses, and rightly so. First, they’re vulnerable to economic shocks; second, they’re considered “elastic” in relation to GDP/economic growth, meaning they move up and down with GDP/growth. Generally, when the economy prospers, people buy more cars, so carmakers’ earnings shoot up. That pushes up the “E,” or denominator, of the P/E ratio. However, investors have a natural skepticism about the staying power…

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