UAW Strike Presents Opportunity For Cheap Entry into EV Boom
With interest rates on the rise and the economy possibly on the verge of recession, you might think that now is not a good time for autoworkers to be on strike. But that’s exactly what they are doing at several of the “big three” major automakers production facilities in the United States.
According to United Auto Workers (UAW) president Shawn Fain, “Our fight’s not just about us, it’s about the working class.” That may be so, but it is the UAW and its employers that are directly impacted.
Fain’s sense of timing may turn out to be perfect. The current occupant of the White House is sympathetic to labor. That may not be true sixteen months from now.
Also, the economy may not slip into recession despite the Fed’s attempts to slow down inflation by ratcheting up interest rates. Unemployment remains low and salaries are on the rise.
There is one more point working in Fain’s favor. New car sales have increased over the past two years despite higher borrowing costs.
Nevertheless, US automakers are taking a beating. Since peaking above $15 in June, Ford Motor (NYSE: F) fell below $12 last week. General Motors (NYSE: GM) has fallen from above $40 to below $30 over the same span.
Stellantis (NYSE: STLA), a Dutch holding company that owns the Chrysler brand, has gained ground this year. But that’s because it also owns several other brands that are unaffected by the UAW strike.
The current slump in auto stocks provides an opportunity to get in on the electric vehicle (EV) boom at an affordable price. The time to buy EV maker Tesla (NSDQ: TSLA) was at the start of this year when its share price fell below $110. Since then, it has more than doubled in price.
To be sure, Tesla is the EV market leader and will be for years to come. But it is gradually losing market share as Ford, General Motors, and other automakers catch up.
Lost in all the angst surrounding the UAW strike is the fact that EV sales hit an all-time high during the third quarter. For the first time ever, total unit sales surpassed 300,000 vehicles in the US.
According to Kelley Blue Book, EV unit sales increased nearly 50% during Q3 on a year-over-year basis. Despite that big jump, EV sales accounted for roughly 8% of new car sales during the quarter.
However, EV sales accounted for only 4.2% of Ford’s total unit sales during the third quarter. That can be viewed two ways; either it is having trouble ramping up EV sales, or it has that much more upside potential to increase EV sales.
I believe the latter is the case. Ford is committed to increasing its share of the EV market. Ford has a publicly stated goal of selling 2 million EVs annually by 2026.
If it can do that, then Ford’s share price should rally strongly over the next couple of years. It has had several false starts over the past year, rising towards $15 only to fall back again.
But one of these days, it’s going to break through. And when it does, it may not hit the brakes until it is above $20.
Better Early than Never
The simplest way to play a Ford rebound is to buy shares of its common stock. At about $12 a pop, it’s cheap.
But if you have a high tolerance for risk and want to roll the dice, buying a call option on Ford may be the way to go. A call option increases in value when the price of the underlying security goes up.
Last week while Ford was trading a little under $12, the call option that expires in January 2026 at that strike price could be bought for $2.25 a share. For this trade to be profitable, Ford must rise above $14.25 within the next 27 months.
Quite frankly, I think it could get there a lot sooner than that. Once the UAW strike is over and the Fed stops raising interest rates, car sales could take off.
If Ford makes it to $25 by the time this option expires, its intrinsic value of $13 would equate to a gain of 478% on a $2.25 purchase price. Bear in mind, Ford was trading above $25 less than two years ago.
I like this trade so much that I executed it in my own account a week ago. I might be a bit early, but that’s okay. I have learned over the years that I lose more money by being too late or never making the trade at all.
Fifty years of wealth-building…
Editor’s Note: For market-thumping gains with mitigated risk, I suggest you consider the advice of our colleague Jim Pearce, chief investment strategist of Personal Finance.
Personal Finance, founded in 1974, is our flagship publication and it has helped investors build wealth for nearly 50 years.
As Jim Pearce just explained, EVs are on the rise. However, fossil fuels won’t become obsolete just yet. Case in point: If you had taken the initial recommendation of Personal Finance to buy Chevron (NYSE: CVX), and held on, you’d be sitting on a whopping return of nearly 3,200% (that’s not a typo).
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