Start the conversation
Last updated: September 24, 2015
How to Trade Volkswagen (VLKAY) Now
When I started Total Wealth, I promised that I would give you a blend of tips, tactics, and specific trading ideas to help you maximize your wealth based on the events of the day.
Today I'm going to keep that promise with a look at how to trade Volkswagen right now, using a brand new Total Wealth tactic I think you're going to love.
What I like about this trade is that it's easy to understand and even easier to implement.
Best of all, the trade I'm going to share with you today has the potential to turn a profit no matter whether the broader markets go up, down, or simply nowhere.
Let's get started!
VW's Fall Highlights Tremendous Profit Potential
German auto giant Volkswagen AG (OTCMKTS ADR: VLKAY) has been clobbered on news that the company deliberately programmed more than 500,000 vehicles to emit lower levels of emissions during official testing than when they're on the road.
As if that wasn't enough, the company admitted Tuesday morning that internal investigations appear to involve another 11 million VW vehicles around the world. It's a betrayal of customers everywhere, who thought they were buying greener, energy-efficient vehicles – including yours truly.
I believe the appropriate German expression is: "Ach du lieber!"
The company's already set aside $7.3 billion in an effort to cover recalls, but the penalties could top $18 billion in the United States alone. Worldwide, the number could be double or even triple that amount, if investigations in South Korea, Britain, France, Italy, and other countries find similar problems.
The reputational damage to the VW brand, though, may represent an extinction-level event. Nobody is talking about that yet, but you can bet your farfegnugen that they will.
A 2010 joint study by Lin Bai of the University of Cincinnati College of Law, James Cox of the Duke University School of Law, and Randall Thomas of the Vanderbilt University Law School found that companies engaged in fraudulent behavior may suffer financial punishment at the hands of the financial markets averaging 7.5 times that of any legal penalties.
VW shares, as you might expect, have tanked. They're down 29% in heavy trading over the past few days. Almost a third of the company's value has simply vaporized.
Millions of investors, large and small alike, are reeling, with shares of BMW and Daimler taking corresponding hits of 6% and 7% respectively, simply because they're German-based, even though the issue does not affect their cars.
For most investors, this is the end of the road – pun absolutely intended. They can't imagine a way out, let alone how to profit from the situation.
But I can, and that's what I want to share with you today.
Introducing a New Total Wealth Tactic Perfectly Suited for "DieselGate"
Most investors have never heard of a "pairs trade." That's what you call a market-neutral strategy many pros use in situations like this one.
Technically speaking, a pairs trade is a form of statistical arbitrage. That's a fancy way of saying that it has two parts and that the relationship between the parts is such that you can profit as the spread between them changes.
First pioneered in the 1980s at Morgan Stanley, a pairs trade typically involves two highly correlated securities. You buy one and short the other simultaneously, creating a "spread." Then, as one weakens and the other strengthens, the spread changes. And that's your profit mechanism.
Historically, the companies have tracked relatively closely, moving more or less in sync with market conditions. If Wal-Mart began looking too hot while Target stayed flat, a trader could buy Target stock while simultaneously selling Wal-Mart stock short.
If Target rose to "catch up," as is often the case in today's highly computerized markets, the trader would make money on the Target stock. Or, if Wal-Mart stock began to slip, he's set himself up for profits, having shorted the Bentonville giant.
Whether the markets rise or fall is moot once this trade is in motion. It's the relationship between the two stocks that matters.
Pairs trades have a number of key advantages.
First, they're great in rocky markets because they help you control risk. It's not uncommon, for example, to have both stocks in a pairs trade fall on a big down day. While that would clobber regular investors, pairs traders may remain completely neutral or even profit if the relationship changes in their favor.
Second, pairs trades are not market-driven. They can potentially profit when the markets go up, when they go down, or even when they go nowhere at all. Remember, it's the relative performance that you're after here.
Third, there's no directional risk. Because a pairs trade always has one long and one short position, the first position is constantly hedging the second.
And fourth, because of the way they work, pairs trades can be very low cost or even no cost. It's not uncommon for the short position, for example, to pay for the long. Margin requirements, as a related item, are typically much smaller, too, because drawdowns are minimal by virtue of the fact that they're always offset.
So let's return to VW.
There is no doubt in my mind that VW is in serious trouble. I think the company's stock is going to take a real pounding and that the financial penalties potentially at hand here will eviscerate earnings for years to come. Customer trust has been shattered, especially among those green-minded drivers who thought they were buying eco-friendly cars.
If the markets take off, VW is probably going to get left behind. If the markets fall, VW will probably fall faster. Nobody wants to be associated with a liar, let alone a company that may have deliberately engineered its products to gain an edge at the expense of the investing public.
Here's one way to play that Total Wealth style using your newly gained knowledge.
Simultaneously buy the S&P 500 using an ETF like the SPDR S&P 500 ETF (NYSE Arca: SPY) and sell short an equivalent dollar amount of VW stock. An equivalent number of shares won't work, so don't mistakenly assume that 100 shares of SPY will offset 100 shares of VW.
As I write this, SPY is trading at $193.60, so that means 100 shares will set you back $19,360, excluding commissions. VLKAY is trading at $25.58. Consequently, you'd sell short roughly 756 shares of VLKAY ($19,360 divided by $25.58 equals 756.84 shares).
If you wanted to follow along with much smaller amounts, the math is the same. For example, let's say you wanted to risk $1,000 on this trade. You could buy 5 shares of SPY and sell short 39 shares of VLKAY, again not including commissions that vary from broker to broker.
As long as VW does, in fact, lag the broader markets and the S&P 500 itself in the months ahead, the trade will make money.
As an aside, you can use a trade like this for any company you expect to underperform the broader markets. We've talked about Shake Shack Inc. (NYSE: SHAK), Zoe's Kitchen (NYSE: ZOES), Twitter Inc. (NYSE: TWTR), and GoPro Inc. (Nasdaq: GPRO) as being terrible investments, for example. They're all great candidates for this kind of trade at the moment.
Now, are there some gotchas?
The biggest is that the spread could narrow instead of widen. That means one or more of the positions go against a trader taking the bet I've described. VW, for example, could appreciate faster than the S&P 500 on nothing more than bottom fishing. A positive news story would do it, too. Even a decent apology would change things.
Pairs traders typically have higher commissions because a single trade involves commissions on both sides. Remember, you're buying and selling at the same time.
Then there's slippage, meaning that a trader may not get exactly the fill he or she is looking for. Pairs trading can involve odd lots that are by their very nature more thinly traded, for example. Or, partial fills.
In closing, pairs trades, like our lowball orders, are a professional-grade tactic you can use very effectively as an individual investor. Moreover, they're tailor-made for the kind of situation VW faces now.
Follow us on Twitter @moneymorning.
Editor's Note: "Pairs trades" work whether the markets move up, down, or sideways – but Keith has an even more powerful strategy for outperforming markets that he's already shared with Total Wealth readers. It's how his very first recommendation to Total Wealth subscribers doubled within six weeks of his recommending it – and Keith still sees more doubles in store for the little robotics company that returned more than 30% in 11 months while the major indices suffered. For a full and free report on the company poised to conquer the robotics revolution – including ticker symbol – sign up for Total Wealth here – it's free!
Last updated: September 2, 2015
Volkswagen Scandal an "Extinction-Level Event" for VLKAY Stock
A Volkswagen scandal is playing out on the world's stage this week – one that could be "an extinction-level event for VW as we know it today," according to Money Morning Chief Investment Strategist Keith Fitz-Gerald.
Volkswagen AG (OTCMKTS ADR: VLKAY) stock plunged 17.1% Monday after the 78-year-old company confessed it deliberately programmed more than 500,000 vehicles to emit lower levels of emissions during official testing than when they're on the road.
Then on Tuesday, another hammer dropped – to the tune of an additional 15.48% loss for Volkswagen stock. This time, the auto giant admitted internal investigations found another 11 million VW vehicles with emissions-cheating software installed. CEO Martin Winterkorn announced his resignation at 11 a.m. ET Wednesday.
"It's a betrayal of customers everywhere who thought they were buying greener, energy-efficient vehicles – including yours truly," Fitz-Gerald said.
Volkswagen is the biggest German car maker and one of the country's largest employers, with more than 270,000 jobs in its home country and even more working for suppliers.
"VW represents about one in 10 vehicles sold worldwide, so this is a huge problem," Fitz-Gerald said. "All by itself, the company employs about one-third of all German auto industry workers. Roughly 20% of German exports are vehicle-related. That's going to pinch everybody from steel makers to tires. Anybody in that industry is guilty by association, unfortunately."
"I cannot recall something so serious in modern times."
Millions of investors, large and small alike, are reeling. Shares of Bayerische Motoren Werke AG (ETR: BMW) and Daimler AG (OTCMKTS: DDAIF) have taken corresponding hits of 6% and 7%, respectively, simply because they're German-based, even though the issue does not affect their cars.
The scandal threatens to crush VLKAY stock – forever. Over the last five sessions, shares are down 29.4% in heavy trading.
Is this only the beginning of the reputational fallout for VW, or has the worst passed?
Let's take a look…
Volkswagen Scandal an Abrupt End to 78-Year-Old Auto Giant?
If you like Volkswagen, this will come as bad news….
"At best, the Volkswagen scandal will drag earnings into the toilet for years to come if the liabilities are as bad as everybody thinks," Fitz-Gerald said. "At worst, the company fails, leaving vultures to pick it over."
"Perhaps it sells Audi, Lamborghini, and Porsche as a part of that, or simply implodes. It's too early to tell. I think it's potentially an extinction-level event for VW as we know it today."
Fitz-Gerald pointed to a 2010 joint study by Lin Bai of the University of Cincinnati College of Law, James Cox of the Duke University School of Law, and Randall Thomas of the Vanderbilt University Law School. The authors found that companies engaged in fraudulent behavior can suffer financial punishment at the hands of the financial markets averaging 7.5 times that of any legal penalties.
Volkswagen has already set aside $7.3 billion in an effort to cover recalls. That's equivalent to about a half-year of profits.
But the penalties could top $18 billion in the United States alone. Worldwide, the number could be double or even triple that amount, if investigations in South Korea, Britain, France, Italy, and other countries find similar problems.
"For most investors, this is the end of the road – pun absolutely intended," Fitz-Gerald said. "They can't imagine a way out, let alone how to profit from the situation." [Editor's Note: Fitz-Gerald does see a way to profit – by using a "pairs trade." He explained the method – and how to use it when it comes to VW – here…]
The Biggest Threat to Your Money Right Now: The desperate EU refugee crisis is a humanitarian emergency, a logistical nightmare, a political hot potato, and a security risk. But what isn't being addressed by major media outlets – yet, at least – is the refugee crisis' effect on global markets… And investors need to prepare for what's coming. Here's how the EU refugee crisis will impact the global economy – and what investors can do now to get ahead of the chaos…
Last updated: September 23, 2015
Volkswagen (OTC: VLKAY) Stock Up 6% Despite Ongoing Scandal
The Volkswagen AG (OTCMKTS ADR: VLKAY) stock price climbed 6% to $26.95 this morning (Wednesday) despite new questions about its diesel emissions scandal.
The biggest news of the day revolved around CEO Martin Winterkorn, who announced his resignation from the company shortly after 11:00 a.m. ET.
Despite today's gain, VLKAY stock is still down 37.4% year to date. Most of that drop occurred this week after news of the company's deceptive emissions behavior broke.
Reports Monday pegged the number of vehicles in the United States involved at 482,000. The German automaker now says the global tally is a whopping 11 million vehicles. As many as 10 million of the affected vehicles are likely in Europe, where VW is the leading auto manufacturer. Diesel cars are much more common in Europe as well.
Volkswagen has set aside 6.5 billion euros, or roughly $7.3 billion, to cover the cost of its dishonest practice. That's equivalent to about a half-year of profits.
Still, the Environmental Protection Agency (EPA) has the authority to fine Volkswagen up to $37,500 per vehicle. That means Volkswagen could be looking at a massive $18 billion fine in the United States alone. Volkswagen could also face accusations of false marketing and consumer lawsuits of its promotion of the vehicles under the "Clean Diesel" label.
The EPA does not yet know exactly what VW did to receive passing grades. The agency is digging to see if VW also violated U.S. pollution regulations.
Volkswagen's diesel cars, according to regulators, are spewing nitrogen oxide at up to 40 times the acceptable level. In addition to contributing to pollution, nitrogen oxide can aggravate respiratory conditions such as asthma, bronchitis, and a host of lung disorders.
Volkswagen was the world's largest vehicle manufacturer through the first six months of 2015. Part of that success was tied to the perceived fact that its clean-diesel engines produce low emissions.
Regardless, the VLKAY stock price has been on a steady decline since May. Even before this week's drop, VLKAY stock dipped 25% from May 1 through Sept. 17.
The European Commission is also conducting its own investigation. Germany announced Tuesday it is launching a preliminary criminal investigation into VW's conduct. Other nations looking into the matter include France, Italy, and South Korea.
The scandal also puts the future of diesel-powered vehicles and their longstanding clean-air and fuel economy reputation at risk as rivals rush to show their diesel engines meet standards.
While VLKAY stock is up 6% today, there is likely more pain ahead for VW shares. Especially if the $7.3 billion already set aside from the company doesn't cover the majority of incoming fines.Stay informed on what's going on in the markets by following us on Twitter @moneymorning.
- CNN Money: Scandal-Tarred Volkswagen Tries to Contain Crisis
- The New York Times: Volkswagen Says 11 Million Cars Worldwide Are Affected in Diesel Deception
- The Wall Street Journal: Volkswagen Faces German Probe into Disclosures of Emission Scandals
Last updated: September 21, 2015
Why the Volkswagen Stock Price Is Down 20% Today (OTC: VLKAY)
The Volkswagen stock price plunged roughly 20% today (Monday) after company officials admitted the company had cheated on some U.S. emission tests. Amid investigations, VW halted American sales of popular new and used 4-cylinder diesel-powered vehicles.
At one point Monday, Volkswagen AG (ETR: VOW) tumbled more than 23% to 129.40 euros in overseas trading. Volkswagen AG (OTCMKTS ADR: VLKAY) shares, meanwhile, sank 18.3% to $29.60 shortly after the opening bell.
But VW's troubles didn't just emerge this morning. There were actually warning signs last week.
After Friday's closing bell, the Environmental Protection Agency (EPA) and California state regulators accused Volkswagen of installing a "defeat device" on its vehicles to dodge emissions requirements.
The German automaker's diesel cars, according to regulators, are spewing nitrogen oxide at up to 40 times the acceptable level. Nitrogen oxide can aggravate respiratory conditions such as asthma, bronchitis, and lung disorders.
Volkswagen was the world's largest vehicle manufacturer through the first six months of 2015. Part of that success was tied to the perceived fact that its clean-diesel engines produce low emissions.
"I personally am deeply sorry that we have broken the trust of our customers and the public," Volkswagen CEO Martin Winterkorn said in a statement Sunday. "We will cooperate fully with the responsible agencies, with transparency and urgency, to clearly, openly, and completely establish all of the facts of this case."
Winterkorn ordered an external investigation and vowed to regain the public's trust again.
But that won't be easy. The German automaker is looking at long and bumpy road. And Winterkorn's fate is uncertain.
In the meantime, the Volkswagen stock price is getting crushed…
Recalls, Fines, and Lawsuits Crush the Volkswagen Stock PriceThis is not the first of Winterkorn's problems in 2015. Earlier this year, he barely survived efforts by a major shareholder to oust him. Just this month, he was passed over for the company's top post as chairman.
"This latest saga may help catalyze further management changes at VW," Evercore ISI analyst Arndt Ellinghorst wrote in a note Monday.
Amid VW's admission of cheating, the European Commission also said it is in contact with U.S. regulators and the company for details.
The effects are wide-reaching.
Diesel vehicles represents roughly 20% of Volkswagen's U.S. sales, according to AutoPacific.
Some 482,000 cars could be at risk. That could force Volkswagen and its Audi arm to issue massive recalls. The vehicles involved include: 2009-2015 Jettas, Beetles, and Golfs; 2014-2015 Passats; and the 2009-2015 Audi A3.
The impact on the Volkswagen stock price could be enormous.
The EPA has the authority to fine Volkswagen up to $37,500 per vehicle. That means Volkswagen may be looking at a whopping $18 billion fine. Volkswagen could also face accusations of false marketing and consumer lawsuits of its promotion of the vehicles under the "Clean Diesel" label.
The scandal comes as Volkswagen deals with declining U.S. car sales. Sales of VW-branded cars in the states slipped 10% in 2014. Still, the company set a lofty goal of almost doubling annual Audi and VW brand sales to 1 million vehicles by 2018.
That goal now looks completely unattainable.
Stay informed on what's going on in the markets by following us on Twitter @moneymorning.
Protect Yourself from a Total Market Collapse: According to CIA Asymmetric Threat Advisor Jim Rickards, there are five "flashpoints" that signal the death of the U.S. dollar and a complete economic collapse in the United States. Here's how you can protect yourself, and your money, before it's too late…
- MarketWatch: VW Shares Crater After Apology in Emission Scandal
- Bloomberg: Volkswagen Drops 23% After Admitting Diesel Emissions Cheat
- The New York Times: Volkswagen Shares Plunge After Halt in Some U.S. Sales
Last updated: January 12, 2015
This Week's "Unloved" Stock to Buy: Volkswagen AG (VLKAY)
An unloved investment is one that's been beaten down – but is actually a great value. Investors then get an amazing entry point into a good long-term investment.
Volkswagen AG: About the Company
Volkswagen became widely known in the United States for its user-friendly original "Beetle" on the 1950s. But the company has the darkest of origins. It was founded in Wolfsburg, Germany in 1937 by a Nazi labor union with the blessing of Adolf Hitler. In fact, the Beetle design resulted from Hitler's 1933 demand for a "people's car" (the German translation of "volkswagen"). Most German cars of the time were too expensive for the average German. Few were built, however, as the arrival of World War II required a retooling to build military vehicles. Volkswagen would have been dismantled after the war, but the British Army took a liking to the Beetles. Ford Motor Co. (NYSE: F) was offered the factory for free in 1948, but declined. Instead VW became a trust controlled by the West German government. By the early 1950s, Volkswagen was exporting its iconic Beetle to nations all over the world. Today, Volkswagen is the second-largest automaker in the world, just ahead of General Motors Co. (NYSE: GM). It owns a dozen brands, including Audi, Porsche, Lamborghini, and Bentley. Volkswagen employs 572,000 worldwide. It has a market cap of about $100 billion.
Volkswagen Stock: Why It's Unloved
Volkswagen stock had a bumpy ride in 2014. VLKAY hit a 52-week high of $53.93 almost exactly one year ago. Since then it fell as much as 29.81% to $37.85. Closing at $41.94 today (Monday), Volkswagen stock is still down 20.5% from that high. The slump started in late February last year when the company made a bid to buy up the part of Swedish truck maker Scania it didn't already own. Investors were concerned VW was paying too much for Scania. Some worried that the company's growth via acquisition strategy was straining its balance sheet. Volkswagen has spent more than $30 billion on acquisitions just since 2009. Compounding those concerns were sluggish sales, particularly in the United States. When revenue slipped even as profits rose in the second quarter (reported July 31), Volkswagen stock got slammed again. Then the overall market skidded in October, dragging VLKAY stock further down.
But Wall Street needs to take a longer view on Volkswagen stock…
Why Volkswagen Is a Stock to Buy
While Volkswagen has spent a lot of money buying other automakers, most of them are luxury brands that command higher profit margins. The company expects its investments to pay off as future profits. And while Volkswagen's debt-to-equity ratio is higher than average at 1.44, it's still way lower than Ford's 4.56. In July, VW announced a plan to reach nearly $6 billion in annual savings to triple its operating margin. This month it announced a plan to regain U.S. market share by expanding its product lines and refreshing models more quickly. But what caught Fitz-Gerald's attention was the 5% stake Volkswagen bought in battery technology startup QuantumScape Corp. in December.
"This reminds me of moves Toyota made when bringing the Prius to market initially and that's played out great," Fitz-Gerald said. Not only can the QuantumScape technology triple the range of an electric car, it's fire-resistant. Such a competitive advantage would make VW a leader in the electric car market. Vehicles with this technology should appear by mid-year.
Investing in Volkswagen Stock (OTCMKTS ADR: VLKAY)
With Volkswagen stock down more than 20% from its highs, investors should buy half of their intended position now. If VLKAY stock falls on some short-term bad news, or if it gets pulled down by another market correction, buy the other half. Volkswagen won't leap to great heights overnight, but its strategies will pay off over the next several years. If the P/E can just get from 8 to the industry average of about 10, Volkswagen stock will gain 25% to $52.40.More Bargains to Buy for 2015: It's easy to find energy stocks pounded by the plunging price of oil, but not as easy to find solid companies worth buying now. Oil and gas explorer and producer Northern Oil and Gas (NYSE: NOG) fits the bill, however. It's down more than 65% from its highs. Here's why this small cap stock is tremendously oversold…
Follow me on Twitter @DavidGZeiler.