• 17 Sep
    Trade fears mean BWA is STILL a screaming buy

    Trade fears mean BWA is STILL a screaming buy

    The Trump administration’s aggressive trade policies with its partners have had global markets on edge for months. And even as headway is being made with Mexico, and pressure is intensifying on Canada to sign the agreement to redo NAFTA by the end of the month, and talks continue with the European Union, concerns and worries persist in particular over how quickly any kind of deal can or will be made with China, America’s largest trade partner. Those concerns have kept pressure on global markets, which also means that stocks in industries that are the most directly impacted by tariffs have experienced the greatest volatility. Stocks in the auto industry, or related to it, for example are among the ones that have seen the biggest swings in price.

    BorgWarner Inc. (BWA) is a good example. While the stock is down about 13.3% year-to-date, it’s actually down a little over 28% since reaching an all-time high in mid-January. I first wrote about this stock a month ago, with the stock at practically the same price it is at right now. That is one of the things that makes the stock interesting right now; while trade war fears have persisted since early spring, the stock has stabilized since July in the mid-$40 range. That has opened an interesting technical opportunity on a fundamentally very solid stock, since the longer the stabilization range holds, the more likely it is to break out of it and rally back to the upside.

    BWA’s fundamental profile is better than many of its brethren in the Auto Components industry, with good cash flow, conservative debt levels and operating margins that have actually improved over the last year despite increasing price pressures. Those pressures include exposure to foreign trade risk, but that is an element that up to this point has yet to be actually be felt. It is true that the stock isn’t immune to the potential long-term effects of trade conflict, but it is also true that most of those effects for now are inferred. If Canada yields as many seem to expect to pressure from the U.S. and from Mexico to join their agreement, look for the market to respond positively, with momentum swinging in favor of the Trump administration versus the E.U. and China. Either way, at its current prices, BWA offers an incredibly attractive value proposition right now.

    Fundamental and Value Profile

    BorgWarner Inc. is engaged in providing technology solutions for combustion, hybrid and electric vehicles. The Company’s segments include Engine and Drivetrain. The Engine segment’s products include turbochargers, timing devices and chains, emissions systems and thermal systems. The Engine segment develops and manufactures products for gasoline and diesel engines, and alternative powertrains. The Drivetrain segment’s products include transmission components and systems, all-wheel drive (AWD) torque transfer systems and rotating electrical devices. The Company’s products are manufactured and sold across the world, primarily to original equipment manufacturers (OEMs) of light vehicles (passenger cars, sport-utility vehicles (SUVs), vans and light trucks). The Company’s products are also sold to other OEMs of commercial vehicles (medium-duty trucks, heavy-duty trucks and buses) and off-highway vehicles (agricultural and construction machinery and marine applications. BWA’s current market cap is $9.4 billion.

    • Earnings and Sales Growth: Over the last twelve months, earnings increased by almost 23% while revenues posted an increase of nearly 14%. In the last quarter, the increase in earnings was more modest at a little over 7%, while sales declined by 3.24%. The company operates with a narrow margin profile, with Net Income running at only about 5% of Revenues for the last twelve months; however this measurement nearly doubled to 10% in the last quarter.
    • Free Cash Flow: BWA’s free cash flow is healthy, at a more than $515 million. While the number declined since the beginning of the year, it has increased since late 2015 from only about $150 million.
    • Debt to Equity: BWA has a debt/equity ratio of .52. This number reflects the company’s manageable debt levels. The company’s balance sheet indicates operating profits are sufficient to service the debt they have.
    • Dividend: BWA pays an annual dividend of $.68 per share, which translates to an annual yield of about 1.5% at the stock’s current price.
    • Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but one of the simplest methods that I like uses the stock’s Book Value, which for BWA is $19.41 per share and translates to a Price/Book ratio of 2.31 at the stock’s current price. Their historical average Price/Book ratio is 2.96. That suggests the stock is trading right now at a discount of a little over 28%, and that puts the stock’s long-term target above $57 per share. Additionally, the stock is currently trading more than 78% below its historical Price/Cash Flow ratio. The stock’s all-time high was reached in mid-January of this year at around $58, which means projecting a 75% increase in the stock may be speculative, especially under current market conditions; however it also suggests there is a good argument for the stock to retest its highs, especially if the broader market can maintain its long-term upward bullish strength.

    Technical Profile

    Here’s a look at the stock’s latest technical chart.


    • Current Price Action/Trends and Pivots: The red diagonal line measures the length of the stock’s downward trend from mid-April to its bottom in July of this year; it also informs the Fibonacci trend retracement lines shown on the right side of the chart. The stock found major support, and the end of its downward trend around $42 in early July, and has used that price area as a pivot low support point on multiple occasions since then. The top end of its range since then is around $46 per share, and the stock would need to break above that level to stage a legitimate trend reversal, with incremental resistance points around $48 and $50.
    • Near-term Keys: If you’re a short-term trader looking for a good opportunity with this stock, a good signal to buy the stock or to work with call options would come if the stock breaks above $46 per share. The stock’s current support at around $42 per share also marks an important signal point for a potential bearish set up, as a break below that point would be a good time to consider shorting the stock or working with put options. If you’re willing to work with a long-term time horizon, and you don’t mind the potential volatility that could come with continued market uncertainty and trade concerns, its current price also offers an excellent starting point for a long-term, value-based opportunity.

  • 19 Jan
    Analysts Have It All Wrong On Tesla

    Analysts Have It All Wrong On Tesla

    • In order to justify current market valuations, Tesla should increase car sales at least 12-fold, but there aren’t any sell recommendations for the company.
    • GM has a market capitalization per vehicle sold that is 79 times lower than Tesla’s.
    • Analysts are extremely exuberant about the market and are misleading investors. A better risk reward model is necessary in order to prevent tragic investment situations.


    As we are in the eighth year of this wonderful bull market, investors, analysts, and asset managers spend much more time analyzing potential rewards than analyzing risk because we easily forget to think about risk which is in opposition to Warren Buffet’s first and second rule of investing:

    “Rule No.1: Never lose money. Rule No.2: Never forget rule No.1.”

    Not losing money means we should spend more time analyzing risk than we should on analyzing potential future investment rewards. Unfortunately, this is neither fun nor cool, and demands high levels of discipline, a very cyclical and long term perspective on investing with strong self-awareness, and confidence in what you’re doing so as to not just follow the crowd. More →