German carmaker VW is putting the emissions scandal behind it, says Matthew Partridge. Traders should go long.
For the past few years Volkswagen AG (Frankfurt: VOW) has been trying to escape the shadow of the 2015 emissions scandal. The German carmaker was forced to confess that it had fitted devices to its diesel cars allowing them to cheat on emissions tests. This led to a blizzard of lawsuits, fines, a temporary halt to sales for certain lines, and even the arrest of Audi CEO Rupert Stadler last year. As a result, Volkswagen’s (VW) share price is still 40% down from its pre-crisis peak in March 2015.
The smog is lifting
Recently, however, there have been two good pieces of news for the company. Firstly, it has continued to make progress with mopping up the remaining legal liabilities from the scandal, agreeing to settle a class-action lawsuit in Australia brought by customers who bought its cars before the deception was revealed. While it is still facing lawsuits in other countries, the indications are that the remaining liabilities are a fraction of the tens of billions of euros already paid out. VW says it has set aside enough money to cover these claims.
In addition to making reparations for its misdeeds, VW is getting into pole position to take advantage of the electric-car revolution. Earlier this month Porsche (which is owned by VW) released the Porsche Taycan, an all-electric roadster that aims to challenge Tesla on its core territory of luxury high-performance cars. The Taycan also won rave reviews from the motoring press, which sees it as a game changer for the industry. Nor has VW neglected the mainstream end of the market. The recently unveiled ID.3 (which can drive up to 550km on a single battery charge) shows that VW’s £27bn investment in electric cars is paying off.
Of course, the main attraction of VW’s stock is its extremely low valuation: 5.5 times 2020 estimated earnings. It also trades at a 30% discount to its book value (net assets). With sales increasing at around 3% a year and VW making a return on equity of slightly more than 10% this seems unduly pessimistic.
The combination of a rock-bottom valuation, diminishing legal risk and a range of compelling products means you should go long on Volkswagen shares with IG Index at their current price of €162 at £25 per €1. In case the price slides, however, set a stop-loss at €22, which would give you a total downside of £1,000.
Trading techniques: Darvas Box Trading
Box trading was a strategy developed by the dancer-turned-trader Nicholas Darvas (pictured), who wrote about it in the 1960 book called How I Made $2,000,000 in The Stock Market. As the book’s title suggested, Darvas claimed that his system, along with some fundamental analysis to spot industries with plenty of growth potential, helped him make $2m in the stockmarket during an 18-month period in the late 1950s.
The idea is that shares tend to trade within a certain range, or ‘box’. The upper and lower bounds are determined by the highs and lows within a certain period, such as 52 weeks. Darvas’ theory is a momentum-based strategy, which involves looking for stocks that are bursting out of the box by making new highs or lows. Provided a rise was accompanied by an increase in the volume of stock traded, and didn’t reverse within a few days, Darvas would start buying the stock. To protect himself, he would place a stop-loss order that would automatically sell a stock if it fell below the lower boundary of the box.
Like all chart-based theories, Darvas Box Trading involves a degree of subjectivity. It is up to the trader where exactly to draw the lines of the box and decide what constitutes a ‘significant’ breakthrough. New York regulators also accused Darvas of exaggerating his profits (although they failed to get his book banned).
However, a 2004 study by Thomas George and Chuan-Yang Hwang of the University of Houston, which looked at US stocks between 1963 and 2001, found that those making new 52-week highs tended to outperform the market, while those making new lows underperformed.
How my tips have fared
My long positions have had an extremely successful fortnight. Five out of six buys have gone up in value. Safestore, which fell marginally, from 648p to 644p, was the only one to decline.
By contrast, Superdry went up from 392p to 429p, Bausch Healthcare from $21.34 to $23.28 and JD Sports from 626p to 718p.
Bellway also moved upwards, from 2,961 to 3,268p while Ted Baker, our latest tip, went from 929p to 1,043p.
The long tips are now making a collective profit of £3,184, the most that they have made since this column’s inception.
Of course, every silver lining has a cloud, so it should come as no surprise that four out of five of my short tips have also advanced.
Weis Markets moved from $38.23, Tesla increased from $225 to $285 and Bitcoin went up from $9,895 to $10,136.
Uber also appreciated, from $32.57 to $34.64. The only one of my short tips to decline was Netflix, which fell from $294to $292.
Nevertheless, the fact that most of the increases were relatively minor means that my current short tips are still in the black, making a collective profit of £667.
Counting the latest tip, I now have seven long open tips and five short tips. While I don’t want to close my JD Sports recommendation just yet, I suggest that you take some profits off the table by increasing the stop-loss to 675p.
I also think it would be advisable to increase the stop-loss on Safestore to 600p. Beyond Meat remains far above the $120 that I suggested as the price at which you should start shorting it.
As a result, I have concluded that it’s time for me to cancel the Beyond Meat short entirely – though I may come back to it in the next few months if the stock begins to fall.