It has been a big news week for the American auto companies. With the restructuring of GM and the agreement between Chrysler and Fiat in the news, we have been keeping in mind some of John Templeton’s observations and investment strategies about the American auto industry. One situation that comes to mind is from the 1970s, which Nikki Ross discussed in Lessons from the Legends of Wall Street:
Buying Stocks below Book Value
During the late 1970s and early 1980s, U.S. auto companies faced severe problems. Oil prices were high and the public was buying small Japanese cars while U.S. auto companies were still producing large cars. Unions were demanding and getting higher wages. Due to the high level of pollution from car emissions, Congress passed a bill making it mandatory to have emission controls on cars, adding to the cost of production. Chrysler was in such bad shape the government had to bail the company out. Ford was losing money as well. Templeton decided to buy Ford.
After he bought Ford, the company reported additional losses. Investors continued selling, sending the price down further. Although he had bought the stock well below book value and didn’t think Ford would go under, Templeton sold his shares later at about nine times his purchase price.
Given Templeton’s experience with Ford in the 1970s, is the situation with GM and Chrysler similar today? Are there bargains to be found in their stocks?