The Auto Stock to Buy During the Volkswagen Fallout

Overreactions happen all the time in the market, often creating great buying opportunities.
Of note, Volkswagen AG (OTC: VLKAY) recently admitted to rigging diesel engines to fool regulators. Given Volkswagen’s tremendous size, its revelation has sent shock waves through the German stock market. The iShares MSCI Germany Index ETF (NYSEArca: EWG) has now fallen 7% year-to-date
In terms of the auto industry, other European automakers like Peugeot SA (OTC: PEUGY) and Renault SA (OTC: RNSDF) have been feeling the pain as well. Both are down more than 25% for the last three months. (And if you think this scandal has been disruptive, take a look at how one technology is already turning the auto industry inside out.)

Diesel is big in Europe. Over 50% of the cars sold on the continent are diesel powered, compared to just 1% in the U.S.
If diesel comes under further scrutiny thanks to Volkswagen’s folly, it could mean more pain for the European players. The market has realized this and responded accordingly.
Even shares of the Mercedes-Benz maker Daimler AG (OTC: DDAIF) are down 15% over the last three months. There will likely be more pain in Europe going forward as these companies face additional costs to comply with stricter regulations.
Our own Stephen Mauzy suggested in the Sept. 25 issue of Income & Prosperity that Volkswagen’s 4%-plus dividend yield is safe. He very well might be right, but Volkswagen shares have continued to weaken and are down another 12% over the last two weeks. It will take time before things start to get any better at VW.

An Intriguing Opportunity

The one auto stock that could be enticing during the Volkswagen fallout is Fiat Chrysler Automobiles (NYSE: FCAU). Shares of Fiat have turned negative since the Volkswagen scandal came to light.
Fiat is headquartered in Italy, but it’s less exposed to the diesel end markets than Volkswagen and other European auto peers.
Fiat has a number of brands across various geographies, which helps give it some diversity. There’s still the opportunity to expand its Jeep, Alfa Romeo and Maserati brands across the globe, including Jeep’s re-entry into China.
Fiat is also the market leader in Brazil and has a stronghold in other emerging markets. Rising middle classes across these regions are a big positive for Fiat.
Now, Volkswagen shares have already lost 48% of their value in just three months. This could pressure the company into exploring other opportunities, including figuring out how to work through the emissions scandal outside the guise of the public markets. One solution is a merger with one of the other carmakers.
Fiat has shown interest in merging with General Motors (NYSE: GM), citing the industry’s need for consolidation to help mitigate the rising costs of safety and emissions technology.

VW-Fiat Merger?

However, could Volkswagen be a better partner for Fiat?
Volkswagen would likely be interested in a deal given the issues that are arising in Europe and possible market share losses in the diesel market. Volkswagen has little presence in the U.S., mainly because it is lagging in the truck and SUV markets. This is an area where Fiat is strong. It has the Jeep brand and its Dodge Ram trucks are gaining market share against Ford Motor Co. (NYSE: F) and Chevrolet.
In terms of Europe, Volkswagen’s factories there are more efficient and modern than Fiat’s. Volkswagen has historically been better at appealing to the European market with its small cars than Fiat.
Volkswagen has fines and penalties to deal with and it will be a volatile stock as criminal investigation news continues to hit. Then there’s the negative consumer perception impact, price declines and brand degradation to think about. Some of these issues will spill over to other European automakers, but Fiat looks well-insulated and could take advantage of Volkswagen’s weakness.

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