To The Moon

Fed Up: 3 Manufacturing Stocks With Sell Ratings

Summary

• According to Powell’s testimony on monetary policy, inflation is again running higher than expected. Next up is Friday’s Jobs Report, CPI on Tuesday, and the Fed decision next Wednesday.
• Weak manufacturing data, supply chain constraints, and the macro environment have created bearish momentum and decreased margins for some manufacturers.
• “As the Fed continues to hike, manufacturing is going to be in the crosshairs,” said senior U.S. economist at Barclays Jonathan Miller. I have three manufacturing stocks already feeling the pain.
• Despite their strong balance sheets, each company has poor profitability and dismal cash, limiting their cushion to withstand a downturn.
• With factory output already -1.7% from post-pandemic peaks, my three picks’ poor fundamentals and cyclical industries are susceptible to a fall in consumer demand and a weak economic outlook. Consider Strong Buy stocks with solid metrics to help curb inflation and costs eating away at portfolios.

HUNG CHIN LIU

Manufacturing Stocks to Sell

Bond yields jumped as bond prices and stocks dove following Chairman JeromePowell's testimonyin his semi-annual conference to Congress this week.

"Although inflation has been moderating in recent months, the process of getting inflation back down to 2% has a long way to go and is likely to be bumpy… The latest economic data have come in stronger than expected, which suggests that the ultimate level of interest rates is likely to be higher than previously anticipated. If the totality of the data were to indicate that faster tightening is warranted, we would be prepared to increase the pace of rate hikes."

As the markets respond to Powell's news, investors await the latest Jobs Report, CPI, and next Wednesday's Fed decision, which could impact whether a recession becomes official.January's Jobs Reportindicated 517,000 new positions added, with unemployment falling to 3.4%. Strong figures suggest Fed Chair Powell will require more rate hikes to tame inflation. Inflation aside, one factor not discussed enough in the headlines, affecting manufacturers, has contributed to a shortage of skilled workers: The push forfour-year degrees.

The Great Recession of 2008 - in part - triggereddegree inflation, where the push for college degrees has led to a shortage of skilled workers in factories and other trades, exasperated by supply chain shortages and the inability to deliver goods. The U.S. is a service-based economy, and companies, especially in the auto industry, ramped up inventories during and post pandemic. The auto industry experienced a boom as surging prices allowed dealers to increase inventories in hopes of meeting demand. But now, there's a surplus in inventory, and companies like the three I'll discuss are experiencing a slowdown, exposing them to the harsh reality of declining revenue and a potential crash.

Automobile Industry Rally to Decline

Banks & Auto Industry Rally to Decline Chart (Bloomberg, Manheim)

The three consumer discretionary stocks I've selected are vehicle manufacturers. As the automotive industry puts on the brakes and banks warn of potential losses, some manufacturers must scale back. The strengthening U.S. dollar also is a headwind for manufacturing amid inflation and the labor market.

Powell's testimony will likely create chaos in the markets, affecting auto manufacturing and industrial sectors that have experienced volatility over the last two years. Seeking Alpha offersTop Industrial StocksandTop Auto Stocksto help avoid stock losers. Because the macro environment is uncertain, the ability to search for stocks with poor fundamentals can prove as important as finding your favorite stocks to buy. Seeking Alpha'sSell Recommendationshaveunderperformedthe S&P 500 for over a decade, and we want investors to know which stocks possess poor fundamentals and outlooks.

Seeking Alpha's Sell Recommendations vs. S&P 500 Total Return Index (SA Premium)

Rather than searching for stocks to buy, check out some of our Strong Sell and Sell stocks or see where your stocks rank by performing a reverse sort using our stockscreener tool. With Daytona Bike Week underway, the world's largest motorcycle event, I felt it necessary to include one motorcycle manufacturer in my list with a sell rating. Although its business model differs from the good ol' American motorcycle manufacturer Harley-Davidson, Inc. (HOG), the macroeconomic scenario is straining both motorcycle companies. Analysts are revising estimates down, and inventory is high, yet the number of units being sold is declining partially due to high-interest rates. Such factors make stocks less attractive, so let us dive into three weak stocks whose quant ratings are sell.

Bike Week 2023 and 3 Weak Stocks

According to aWall Street Journal headline, the manufacturing sector is at risk as factory demand slows, with output down 1.7% from post-pandemic peaks. Supply chain constraints are one of the biggest catalysts for automotive and motorcycle manufacturing weakness. It's hard to get semiconductor chips, but overall production has yet to recover from the pandemic, and the strong USD is making exports expensive. Feeling the effects is my first stock, a motorcycle manufacturer with a sell rating.

1. $Gogoro(GGR)$(NASDAQ:GGR)

• Market Capitalization: $1.05B

• Quant Rating: Sell

• Quant Sector Ranking (as of 3/6): 498 out of 543

• Quant Industry Ranking (as of 3/6): 5 out of 5

Move over, Harley-Davidson! Two-wheeled vehicles are going green, and motorcycle manufacturing company Gogoro Inc. (GGR) is revolutionizing how two-wheelers worldwide are entering the market as a cleaner, more sustainable way of riding. Capitalizing on the electric vehicle (EV) trend, GGR offers two-wheeled scooters boasting the most advanced swap and go battery system around the globe. Reimagining electric fuel, Gogoro's batteries offer a swappable infrastructure for gathering, analyzing, and sharing riding data through smart technology. Although the Taiwanese company, Gogoro, has a strong balance sheet and expansion plans, GGR displays poor profitability.

The table below shows that GGR has a trailing EBIT Margin of -31.22% vs. the sector median of 7.66%. As automotive manufacturers grapple with too much inventory compared to demand, price pressures pose concerns, especially for smaller companies like GGR that need the appropriate cash flows to fall back on.

GGR Stock Profitability Grade (SA Premium)

GGR is quant-rated a sell and significantly underperforming the S&P 500 over the last year. Compared to the S&P 500 performance, not only is GGR -58.47%, the stock'sdeclining momentumis presently below the 200-day moving average and has fallen along with its 10-day moving average.

1-yr GGR Stock Performance vs. S&P 500

1-yr GGR Stock Performance vs. S&P 500 (SA Premium)

Although the stock comes at a relative discount, highlighted by an overall C valuation grade,underlying metricslike EV/EBITDA and EV/Sales are significantly higher than its sector peers. Inflation, supply chain constraints, and a difficult macroeconomic outlook are posing headwinds that have resulted in a 9% decline in GGR sales over the 12 months in 2022 compared to 2021. Where the trends for electric vehicles are growing, growth in Gogoro's sales remains to be seen, along with the further adoption of EVs in the slowing environment. Although many consumers want to focus on smarter, greener solutions for their mobility needs, GGR downtrend andunattractive characteristicsare historically associated with poor future stock performance, along with my next stock.

2. $NIO Inc.(NIO)$ (NYSE:NIO)

• Market Capitalization: $15.81B

• Quant Rating: Sell

• Quant Sector Ranking (as of 3/6): 482 out of 543

• Quant Industry Ranking (as of 3/6): 25 out of 30

Chinese smart electric vehicle designer NIO Inc. (NIO) has given its rival Tesla (TSLA) a run for its money. Where Tesla aims to cater to the masses, NIO boasts a more attractive, luxury body type, plush leather - even offering it at a lower price than Tesla, whoseU.S. priceshave been revised four times in two months! Inventory compared to demand is posing concerns for manufacturers everywhere. During the Q4 2022 Earnings Call,Elon Musk said,

"2022 was an incredibly challenging year due to forced shutdowns, very high-interest rates, and many delivery challenges… The most common question we've been getting from investors is about demand… we think demand will be good despite probably a contraction in the automotive market as a whole. So, basically, price really matters. I think there's just a vast number of people that wanted to buy a Tesla car but can't afford it. And so these price changes really make a difference for the average consumer."

Despite Wall Street analysts suggesting that Tesla and NIO stocks are a buy, our quant ratings highlight why NIO's poor factor grades and underlying metrics result in its sell rating.

NIO Inc. Has Poor Quant Ratings and Factor Grades

NIO Inc. Has Poor Quant Ratings & Factor Grades (SA Premium)

NIO Stock Valuation and Momentum Grades

Highly overvalued, NIO receives an 'F' valuation grade, which includes a D rating for trailing Price to Sales, a 142% difference to the sector, and a D- Price/Cash Flow with a 282% difference. On a longer-term downtrend, NIO's shares have been trading below the 200-day moving average on the heels of poor Q4 Earnings, which delivered both top-and-bottom-line misses.

NIO Stock Growth and Profitability Grades

Phased-out electric vehicle models and rising battery costs resulted in Q4 margin declines of 14%. Although the company anticipates increased demand that could increase revenue, inflation, and economic slowdowns across the globe, escalating costs are likely to create increasing pressure on NIO's margins. As evidenced in its ongoing back and forth with Tesla, rising competition and semiconductor supply chain constraints still pose issues to those companies in the EV space. NIO's fourth quarter EPS of -$0.52 missed by $0.23 and revenue of $2.34B missed by more than 50% year-over-year can serve as strong indicators of poor performance. In addition to 12 analysts that revised estimates down over the last 90 days, NIO is a stock that our quant ratings have flagged with awarning bannerbecause it possesses characteristics historically associated with poor stock performance. Decreases in gross margin quarter-over-quarter were primarily attributed to decreases in sales, accelerated depreciation on production facilities, and loss on purchase commitments for older vehicle models that will be discontinued. Where the automotive industry is very cyclical and highly competitive, there can be major swings in return on invested capital, especially given the slowing macro environment. Because more competition is entering the electric vehicle space, NIO is investing in R&D, a capital-intensive necessity in the auto industry to remain competitive and differentiate itself. With changing technology and substantial investment in R&D, NIO could find itself lacking the ability to generate and capitalize on the returns needed.

3. Lucid Group, Inc. (NASDAQ:LCID)

• Market Capitalization: $16.36B

• Quant Rating: Sell

• Quant Sector Ranking (as of 3/6): 490 out of 543

• Quant Industry Ranking (as of 3/6): 28 out of 30

Another automobile manufacturer that we've flagged at high risk of performing badly is Saudi Arabian-backed Lucid Group, Inc. (LCID). Focused on automotive tech, specifically the building of electric vehicles, Lucid Group has been on the downtrend, burning a tremendous amount of cash it uses to fund operations. After disappointing fourth quarter earnings that included an EPS of -$0.43 that missed by 40.02 and revenue of $257.71M that missed by 876% Y/Y, LCID led the fall inEV stocks, dropping 12.23%. Lucid's shares have fallen more than 60% over the last year.

LCID Stock Profitability (SA Premium)

Like NIO, Lucid has had issues with production, supply chain constraints, and lagging demand, resulting in slowing momentum and poor valuation. Its D-valuation graderesults from a forward EV/Sales ratio of 11.13x, more than 823% difference from its sector peers, and abysmal Price/Sales figures. Although Lucid's year-over-year revenue growth figures and overall growth grade are strong, the company is extremely short on cash, highlighted by an 'F' grade for Cash From Operations, -$2.23B, and the supply chain shortages are likely to further eat into dwindling profits. During the Q4 2022 earnings call, Lucid CEO and Chief Technology Officer Peter Rawlinson discussed how Lucid has been focused on making cars, but the key is being able to sell and make money off of them. Concentrated on making the cars, the executive team worked to identify and remove manufacturing bottlenecks, slowing demand, and supply chain constraints.

"In 2023, we have two prior strategic areas of focus. Number one, customer awareness and growth; and number two, a laser focus on cost…the early momentum we had that was impacted by our ability to manufacture. As for delivery, we identified the issues and moved quickly to address them. We've gotten past the major bottlenecks limiting manufacturing, but this had some impact on the demand we generated early on, and this has been exacerbated by the challenging macroeconomic environment,"said Rawlinson.

Where NIO and Lucid Group are beaten-down stocks struggling to rally amid a difficult economic outlook, considertop consumer discretionary stockswith strong underlying metrics.

Should I buy manufacturing stocks?

GGR, NIO, and LCID have solid balance sheets complemented by strong growth. My three stocks are rated a sell based on unattractive profitability, poor momentum, downward EPS revisions, and relative overvaluation. With the Fed continuing to raise rates to tame inflation and the labor market signaling resilience asQ4 jobless claimsedged lower, as senior director of Economics at The Conference BoardAtaman Ozyildirim, Ph.D. said, "12-month inflation expectations improved, falling to 6.3% from 6.7% in January. However, fewer consumers are planning to buy homes, autos, or major appliances." Although economic indicators could see a rebound, SA ContributorJames Picerno points out,

"The strength in retail spending and payrolls in January conflicts with a variety of broad business-cycle indicators that reflect a weak economy. Judging by the renewed push higher in the policy-sensitive two-year Treasury yield, the bond market is again leaning toward the view that monetary policy will need to stay tighter for longer to tame inflation."

With tighter monetary policy, avoid stocks with poor fundamentals like the sell-rated stocks mentioned. Consider top-rated stocks orTop Dividend Stocksto help offset inflationary concerns that can benefit in either a rally or downturn. Many companies are facing headwinds, especially those lacking profits. Capitalizing on companies with strong financials offers a better opportunity to withstand headwinds while providing an opportunity for the future as economies rebound and demand for infrastructure grows when manufacturing is likeliest to experience an upside.

Source: Seeking Alpha