We are moving Volkswagen AG (VWAGY) to a SELL
Volkswagen shares surged today, up 32% at the time of this note, following a 10% jump yesterday. At just over $43, or the equivalent of €355 after converting the ADR to ordinary shares, the stock is about 40% above its previous record high set in early 2015. Year-to-date, the shares have gained about 120%.
What is behind the move? We see several drivers. First, the company has moved past the diesel scandal by paying large fines and changing its leadership and governance. Second, the company appears to be operating more efficiently and benefitting from a strong demand recovery, particularly in China. Management has alluded to a possible spin-off of its high-value brands like Porsche and its more prosaic Traton truck business. Most important, though, VW is positioning itself as a leader in electric vehicles and the battery technology that will power these vehicles.
At its first-ever Power Day earlier this week, the company highlighted its goals of reducing battery costs by 50%, building a widespread charging network in key markets, constructing six battery factories, and other impressive targets including having 60% of its European sales coming from electric vehicles by 2030. We think VW is moving in the right direction with its EV initiatives.
However, the shares are discounting a prosperous future. But that future may not arrive for ten years, and by then the anticipated prosperity may not be quite so golden. Competition for EVs will be fierce, and its not clear how profitable these vehicles will actually be. In the meantime, Volkswagen will still be a gas-powered vehicle company with average profitability that remains vulnerable to cyclical car demand. Its EV initiatives will have a voracious capital appetite. There are many hurdles to overcome to justify a share price much higher than the current price.
As such, we are moving shares of Volkswagen (VWAGY) to a Sell. Since initiating with a Buy in March 2017 at $15.91, the position has produced a roughly 164% gain, excluding dividends.
We are limited to a binary approach to our ratings: a stock is either a Buy or a Sell. We rarely use Holds and have no capacity for partial positions. With today’s momentum-driven market, holders of VWAGY shares may, however, want to sell only part of their position (perhaps half or three-quarters) now, leaving the balance to the possibility that momentum-oriented investors push the shares even higher. Stocks reaching unjustifiable levels often continue to drive upwards, and there’s nothing wrong with participating in that with a few shares.