2 Auto Stocks At Risk of Downgrades

Tariff concerns could also weigh down LKQ, GM shares

Managing Editor
Aug 8, 2018 at 12:10 PM
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Auto stocks are in focus today after China levied a 25% retaliatory tariff on $16 billion of U.S. goods, most notably crude oil and cars. In addition to sector peer Dana Inc (DAN), both LKQ Corporation (NASDAQ:LKQ) and General Motors Company (NYSE:GM) could struggle in the coming months.

LKQ Rally Appears To Have Lost Steam

At last check, LKQ Corporation stock was down 1.1% to trade at $34.06. The auto parts maker has rallied 13% since consolidating near the $30 level in late April, but has not been able to fill the entirety of that earnings-induced bear gap. Overall, LKQ is staring at a 16% deficit for 2018. 

Daily Stock Chart LKQ

To make matters worse, LKQ found itself on a list compiled by Schaeffer's Senior Quantitative Analyst Rocky White containing stocks with the worst 2018 returns, but have yet to receive proper bearish analyst sentiment. More specifically, of the 12 brokerages covering LKQ, 11 still rate it a "buy" or "strong buy," with zero "sells" on the books. Should LKQ keep struggling, it may prompt these analysts to re-think their bullish stance.

Options traders have been almost exclusively targeting LKQ calls lately. Data from the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) shows 1,797 calls bought to open in the past 10 days, compared to just 13 puts. The resultant call/put volume ratio ranks in the 91st percentile of its annual range, indicating calls have been bought over puts at a faster-than-usual clip during the past two weeks.

General Motors Stock Held In Check By Key Trendline

Looking at General Motors, the stock is flat today at $37.58. Since a mid-June high near the $45 area, GM has given back 16.5%, ushered lower by its 20-day moving average. More recently, the stock gapped lower in late July following a subpar earnings report, running the year-to-date deficit to more than 8%. 

Daily Stock Chart GM

Like LKQ, GM showed up on White's list of stocks vulnerable to bear notes. Of the 15 brokerages covering GM, nine rate it a "buy" or better, with not a single "sell" on the books. In addition, the security's consensus 12-month price target of $46.84 sits at a nearly 25% premium to its current perch. 

Traders looking to take advantage of the equity's struggles may want to do so with near-term options, which are attractively priced at the moment. GM stock currently sports a Schaeffer's Volatility Index (SVI) of 23%, which ranks in the 21st percentile of its annual range. This suggests that near-term options are pricing in relatively low volatility expectations at the moment, which could help maximize the benefit of leverage for premium buyers.

Furthermore, the auto stock has been a good target for premium buyers during the past year. That's according to its Schaeffer's Volatility Scorecard (SVS) of 93 out of 100, which shows it's tended to make much bigger-than-expected moves on the charts compared to what the options market was expecting.

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