As many are aware by now, the German multinational automotive giant Volkswagen (VW) has been linked to a scandal relating to the manipulation of emissions relating to its diesel models. What’s more this is not just speculation, but the company has actually admitted to the accusations and insisted that it will “pay whatever it needs to pay”.
Background on the Scandal
According to a post on financialpost.com:
“Both the U.S. Environmental Protection Agency and the California Air Resources Board accused Volkswagen of fudging test results for “clean diesel” products, including the Golf, Passat, Jetta, Beetle and Audi A3 models, in some cases going back to 2009.”
In a nutshell the company was using devices to purposely reduce emission levels during testing and thus making its diesel engines appear much cleaner than they actually are. Why? Keep in mind that nowadays, even locally the license paid for registration and the annual road tax of a car are directly linked to the emission levels that the car produces. Furthermore, people have become more environmentally concious over the last decades as we have seen advances in many ‘clean energy’ products such as household appliances and the surge in renewable energy systems.
Therefore, the worst part of the scandal could be the reputational damage that it has created. This is besides the fines that the company could face which are expected to potentially reach USD 18 bln in the US alone (with possible law suits elsewhere). The matter is made even worse when one considers the vast range of brands that VW owns. Volkswagen Group sells passenger cars under the Audi, Bentley, Bugatti, Lamborghini, Porsche, SEAT, Škoda and Volkswagen marques; motorcycles under the Ducati brand; and commercial vehicles under the MAN, Scania, Neoplan and Volkswagen Commercial Vehicles marques.
Of course this is not the first time that VW and many other car manufacturers were involved in negative situations which are normally in the form of recalls. It will also not be the last time that a car manufacturer is faced with law suits or recall expenses.
Ideas to Trade the Scandal
1. Trade the VW Shares
The most obvious manner in which one could ‘trade the scandal’ and try to benefit from it is to trade in the company’s shares. The main listing of the shares is EUR, however the share can also be traded in USD through the ADR. The big question if one decides to trade in the shares directly is should one buy the share or should one short the share? This all depends on one’s expectation of events.
Many a time in such situations of big news the stock market tends to over-do the situation and shares tend to move a lot more than they should. Is this the case with VW shares? Could be…however there are still a lot of unknowns surrounding the case. So we know that the company has admitted to the manipulation of the figures and we also know that the company has issued a profit warning directly related to this incident, meaning that the company is expected to have less profits this year directly as a result of the incident. These two facts have lead the company to lose roughly one third (-33%) of its value on the stock market in 2 days.
Thus investors who believe that the worst is over and think that the market has overdone the situation might consider buying shares or waiting a bit further to buy some shares in the coming days. The problem with this strategy is the unknown factors – will there be more law suits? Will the company come out with more negative news to get it all dealt with at once? How will sales figures actually be affected? How will the entire range be affected?
The other option if one wants to trade the shares of VW is to short the shares rather than buy them. When one shorts the shares one effectively ‘borrows’ them and sells them with the intention of buying them back at a later stage. Thus if one shorts the shares of VW today and buys them back in a few days/weeks time at a price lower than the current price, a profit will be made. Check out the video below for a visual description of what shorting is:
2. Trade Competitors’ Shares
Another option to try to profit from the VW scandal is to trade shares of competitors. Given that economies are improving and the price of running a car have gone down (as a direct result of lower oil prices), global car sales are expected to have a positive year. So an alternative trading strategy would be to buy the shares of competitors of VW – these stand to gain from the loss of market share of VW.
Some examples that come to mind that have publically listed shares include:
- BMW AG
- Toyota Motor Company
- General Motors
- Peugeot SA
- Daimler AG
- Ford Motor Company
- Fiat Chrysler Automobiles
- TATA Motors
3. Trade the VW Bonds
In the wake of the news the bonds issued by VW have gone down in value and could present an opportunity to buy them at a discounted price. Please see the following link for a list of bonds issued by VW. If we take as an example the 2% Volkswagen International Finance 2021 bond the price has gone down from around €109 per 100 nominal in March of this year to a current price of around €100.70 per 100 nominal. This gives one a yield of around 1.90% (please see my previous posts on yields and the worth of buying bonds).
This means that this bond has gone down around 8.25% since March, however it is still only trading a yield of less than 2%. This is saying two things to investors: a) Yields are so desperately low that even with such negative news the price of the bond did not go down enough to present a very high yield; b) bond investors are not expecting the scandal in question to be too severe for the company.
4. Trade an ETF containing VW
Another option is to buy an ETF that has VW as one of its holdings. Please refer to a previous post of mine which discusses what an ETF is. One such ETF that comes to mind is the iShares STOXX Europe 600 Automobiles & Parts UCITS ETF (DE) which has an exposure of around 11.55% in VW. The idea here is to gain exposure to VW, but to do it in a limited manner. Furthermore, if the other automobile companies benefit from the loss of market share of VW one would also stand to gain in such a fund since the other 88.45% of the fund is invested into competitors of VW.
The Bottom Line
VW is still a very large company with a diversified range of brands and very large reserves (as at June 2015 the half yearly report of Volkswagen AG Group showed a figure of €17.6 bln in cash reserves). The incident will continue to affect them negatively in the months to come when sales figures are expected to be lower as a direct cause of this scandal. There are many unknown factors surrounding the company so investing directly into the shares of VW could be quite a risky preposition. However, as I discussed above, there are other ways of potentially profiting from the situation without having too much exposure to the company.
Group premium brands such as Porsche, Bently, Bugatti, Lamborghini and Ducati will not be expected to be affected by this incident. However there could be a spill over effect in the lower to mid range brands such as Seat, Audi and Skoda. All in all it is very difficult to gauge the severity of the situation and as always only time will tell how this one will play out.
As usual please keep in mind that nothing on this site should constitute investment advice and further discussions with a financial professional would be required before considering any option mentioned in this post. Please refer the full disclaimer.