By Michelle Jones. Originally published at ValueWalk.
Ford Motor Company (NYSE:F) and General Motors Company (NYSE:GM) have been forced to cut back on production further due to the widespread chip shortage. The auto market would normally do well in an economic recovery, but the chip shortage means investors might have to get a little creative to tap into the market.
Q1 2021 hedge fund letters, conferences and more
One trader suggests CarMax, Inc (NYSE:KMX) as a potential hedge in the auto market.
More production cuts by Ford, GM
Fox Business reports that the global semiconductor shortage has forced further production cutbacks at GM’s and Ford’s factories in North America. The shutdowns are expected to take a bite out of dealer inventory of vehicles manufactured at those factories.
In a statement, GM said it has been able to keep plants that manufacture its most popular and profitable SUVs and full-size pickups going. The semiconductor shortage has been going on since last summer and has affected more than just the auto market.
For example, schools have had a hard time purchasing enough laptops for students who had to attend class online, and the release of the iPhone 12 and other popular devices was delayed. The shortage also squeezed the gaming console market, making it difficult to find the PlayStation 5 and the newest Xbox model.
Chip shortage worsens
Over the last few weeks, the chip shortage has gotten even worse, especially in the auto industry, as companies are forced to shut their factories down due to a lack of chips needed to finish building their vehicles. The issue was worsened further by the grounding of a container ship in the Suez Canal, which blocked shipping traffic for almost a week, preventing semiconductors from reaching Europe from Asia.
Consumers will likely be forced to settle for lower-end vehicles that don’t have as many electronic features. As a result, the auto industry is expected to take a major hit this year. According to Fox Business, some estimate that the industry will lose $60 billion in revenue in the first half of this year.
CarMax as a hedge in the auto market
JC O’Hara of MKM Partners told CNBC that he has a way to get exposure to the auto industry without dealing with the headwinds from the chip shortage. Despite the chip shortage, GM and Ford are up more than 40% year to date, but that could change if the shortage goes on for a long time.
O’Hara told CNBC that used car sales are “through the roof,” so he likes CarMax for its exposure to the market. CarMax is up more than 100% over the last 12 months and 36% year to date. As GM and Ford move into electric vehicles, semiconductors will be in even shorter supply, and it could take months for the shortage to be worked out.
The post Investing in the auto market but worried about the chip shortage? Check this hedge appeared first on ValueWalk.
Sign up for ValueWalk’s free newsletter here.
