Trump announced in a tweet on Thursday night that he would impose a 5% tariff on Mexican imports. The President tweeted, “On June 10th, the United States will impose a 5% Tariff on all goods coming into our Country from Mexico, until such time as illegal migrants coming through Mexico, and into our Country, STOP. The Tariff will gradually increase until the Illegal Immigration problem is remedied…….at which time the Tariffs will be removed.” Frustrated with the lack of what he views as progress on border security, Trump is now putting it to Mexico to take action to reduce or eliminate the number of illegal aliens that are crossing the border into the U.S.
The move put immense pressure on the auto stocks, sending Ford (Ticker Symbol: F) gapping down 4% and General Motors (Ticker Symbol: GM) gapping down 5% on the open of trade Friday Morning. Both companies have invested billions of dollars on production in Mexico and also import a large number of their parts from Mexico as well. General Motors imports 29% of its parts for its cars and trucks from Mexico, Ford imports 17%. Just under half of all the Silverado trucks that are sold domestically are made in Mexico.
Above is the long term weekly chart for General Motors’ stock price. The stock had a rough start early in the decade. Starting in 2011, General Motors pulled back over 40% over the next 18-months, finding support under the $20.00 price level. General Motors’ stock then bottomed, forming a bullish divergence pattern, as indicated on the chart by the red squares, where the stock makes a lower low in price but the Relative Strength Index makes a higher low.
General Motors broke above its downtrend line in the third quarter of 2012 and traded up from its yearly lows to rally over 60%. The stock then proceeded to form a long-term consolidation wedge. A wedge is a series of progressively lower highs and higher lows that form until the stock gets into a tight range and then generally breaks out of the wedge higher or lower, usually in the direction of the trend. The stock broke out of that wedge to the upside and proceeded to rally 40%, leading to an all-time high for the stock of $46.76 on October 23rd, 2017. Since then, the stock has been a choppy trade, trading in a $15.00 range from low to high. General Motors’ stock is currently trading below its 100 and 200-week Moving Averages.
(Chart above courtesy of www.tipranks.com)
Based on a survey of 8 analysts offering 12-month price targets, the average price target for General Motors’ stock is $40.67. According to that number, the stock is priced at a discount relative to Wall Street’s analysts and could be considered undervalued around current levels near $33.26.
The automakers are now having to deal with tariffs on the Chinese front and on the Mexican front. Clearly, General Motors’ and Ford’s profits could get slashed by billions. The majority of the tariff costs will be passed on to the consumer, causing higher prices domestically. Investors in the auto space should watch out for headlines on US-Mexico border control and a US-China trade deal for fresh news within the sector.