The German car giant Volkswagen (VW) has admitted cheating emissions tests in the US by using a sophisticated software in diesel cars being sold in the US that could regulate emission performance and detect when being tested according to the Environmental Protection Agency (EPA). The shares dropped more than 30% after the scandal was made public.
Is the Volkswagen Scandal an Opportunity?
I don’t know yet and most likely not now as selling pressure continues. It’s better to wait until the dust settles, and speculators and forced seller are running out of arguments to sell. But at least VW got my full attention and stopped me from whatever I have been doing up until now.
Running through my personal investment checklist, I can tell several things so far. As horrible the scandal and as severe the consequence might be, the scandal of manipulating emission data in the US can and will be contained and the earnings power of VW hasn’t been lost and will be completely restored – of that I am sure.
VW is one of these rare events every Graham value investor looks for. A very large blue chip company, here a global fortune 500, experiences a severe event with a huge impact on its share price. Toyota’s USA defect cover-up comes to mind. Within two days VW has lost 18 percent Monday and nearly 20 percent on Tuesday. VW lost about $37bn of its market cap within a couple of days. Fundamental, rational assessments go right of the window and panic selling takes over. Analysts recommending the company with a strong buy a week before, now touting a strong sell recommendation.
Motivated and forced sellers galore
Traders buying on margin or technical reasons had to execute their position rapidly. Rating agencies’ quick downgrades have been forcing institutional investors to unload or at least reduce their VW positions. Add to this short-sellers in search of quick profits and index funds in need of rebalancing their portfolios, a blind person can see the enormous selling pressure. Definitely exaggerating to the downside until the selling frenzy will have stopped and normal market mechanism take over again – that might take several more weeks.
Now the big question is, do we get value at current prices? Is it in our circle of competence and does it offer a margin of safety. Even though I am not a car analyst, I am very comfortable in investing in VW. By applying my 80/20 factor, part of my investment checklist, I know enough about VW and the automobile industry. Determining the exact value might be impossible right now, and I need to run some more numbers, but remember, we want no-brainers and no-brainers present themselves easily without over complicated financial spreadsheets and calculations – “I know it when I see it”. A back of the envelope calculations suffices. From what I see right now the stock offers long-term value at current prices.
I have decided to buy a couple of Volkswagen shares to build up a small position using my cash portfolio. That gives me time to do more calculations and research and add to the position at lower prices. A final word on VW experts and analysts you will be hearing from en mass. It’s worse than hearing politicians arguing on election night. The best is to ignore them altogether and use only their offered data to build your own investment conclusions.
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