Should you or should you not buy VW shares? As the news continued to come on the emissions scandal last week, many investors were selling their stakes, and the company’s stocks lost some 30 per cent on Monday and Tuesday. Shareholders were spooked by fears of a hefty fine of up to $18bn from the Environmental Protections Agency (EPA) in the US, and additional fallout from civil and class actions suits.
But by Wednesday, it dawned on some investors that the selloff – exacerbated by short sellers – had been overdone, and that the stock might provide a bargain. The company also moved quickly to apologise, assign blame, and replace chief executive Martin Winterkorn.
Deutsche Bank analysts are still cautious, though: “we think the impact on the operational business – namely volumes, residual values, pricing and costs – is even harder to estimate and is the key concern here. A main element of our buy case had been significant cost cuts.
Read more: Volkswagen share price continues to churn
“We now believe that rising costs for diesel cars will offset most of the effects. Most importantly, we have taken a more cautious stance on the growth outlook for VW and Audi and believe pricing will come under pressure due to the reputational damage. Consequently, we cut our 2015-2017 earnings by up to 35 per cent.”
The bank adds that “any €1bn additional fine would take away €2.02 per share” – it has downgraded the stock from Buy to Hold.
Saxo Bank’s Peter Garnry agrees: “we don’t think the current provisions are big enough. VW has set aside €6.5bn to cover the costs, but that market has already taken out €25bn. Clearly, the market thinks the fine will be bigger than the $18bn the EPA has talked about. This is a huge scandal and it looks like this was not an isolated case in the US.”
This begs the wider question: are they catching a falling knife, or is buying heavily-beaten down crisis stocks a viable strategy?
Take BP – the enfant terrible after the disastrous Gulf of Mexico spill. If you bought BP’s stock after disaster and held it until today, you would have lost half of your money. Buying on the dip did not turn out to be a profitable strategy – the losses and legal problems stemming from the environmental disaster rose relentlessly. Other issues like the precipitous drop in the oil price also contributes to BP’s stock woes.
But look at Toyota, which was marred by recalls in 2010, and the story looks somewhat different. Between February 2010 and March 2014, Toyota’s stock gained 45 per cent. Yes, it dropped after the recalls, slumping by 20 percent – a $35bn loss of market value. But the longer-term performance shows it has regained speed.
The bottom line is that generalising investment strategy around three crisis stocks is close to impossible. But think about this: apart from the fundamental question of how risk averse you are, the other key issue is how long your time horizon for investing is.
Buying on the dips may prove a profitable strategy if you’re spot on with timing. Very few of us are, though. In the absence of the light at the end of the tunnel, the more prudent strategy may be to steer clear of crisis stocks. After all, a stock that looks cheap may be a bargain for good reason.