Editor’s note: This column is part of InvestorPlace.com’s Best Stocks for 2022 contest. Josh Enomoto’s pick for the contest is Sonic Automotive (NYSE:SAH) stock.
It’s a thesis that initially goes against all common sense, from the shift in monetary policy by the Federal Reserve to gradually improving global economic metrics as society acclimates to the coronavirus pandemic. Nevertheless, the underappreciated fundamental catalysts for Sonic Automotive (NYSE:SAH) — the fourth-largest automotive retailer following its acquisition of RFJ Auto Partners — could inexplicably bolster SAH stock, making it potentially one of the best stocks for 2022.
For those who are skeptical, rest assured that the idea of acquiring shares of this dealership — or any dealership for that matter — is highly speculative. It’s possible, perhaps even probable, that I could be dead wrong about SAH stock. Certainly, it wouldn’t be the first time I’ve blundered on a bullish opportunity, and I guarantee it won’t be the last.
Nevertheless, the outside fundamentals that have been driving the meteoric rise of used-car prices appear to be only growing stronger. Admittedly, the concept of yet higher values for secondhand vehicles seems absurd. With the Fed all but promising to raise interest rates in 2022, borrowing costs would only increase. Naturally, that’s not a circumstance that appeals to consumers.
However, the Fed’s disclosure about rising rates will likely accelerate an already-hot housing market. Therefore, the auto market may experience some downwind benefits. More importantly, both new and used cars have seen their value skyrocket not because of monetary policy but due to a critical supply crunch.
That condition might not improve until 2023, which segues into these three points supporting SAH stock as one of 2022’s best stocks.
Constraints at the Top
When the coronavirus started rippling across the globe, automakers intuitively sensed the beginning of a recession — possibly even a depression. Therefore, the safe action to take was to cancel production, both the vehicles themselves and the components that go into them. Key among the latter is semiconductors.
At first, it seemed the logical move. For instance, the World Economic Forum noted that car sales in China fell 92% in the first half of February 2020. But quickly, it became apparent that the desire for hitting the open road did not diminish because of the Covid-19 pandemic; indeed, it may have sparked greater demand due to fears of infection.
Suddenly, automakers did an about-face and requested their chips back. But not only did semiconductor manufacturers reallocate production for other industries, they were happy to do so. You see, sectors like consumer electronics gobble up advanced, higher-margin chips, not the high-effort, low-profit variety that goes into vehicles.
SAH Stock Faces Trouble in the Midstream
During my interview with CGTN America anchor Rachelle Akuffo, I mentioned that the global supply chain crisis affecting retail goods deliveries stemmed in part from a shortage of truck drivers. While I was somewhat correct, it’s difficult to provide a complete narrative over a six-minute TV spot.
Essentially, one of the roots of the problem within the supply chain’s midstream segment is an economic incentive misalignment. Longshoremen who work the docks typically receive payment by the hour whereas truck drivers get paid by the mile. In other words, they’re not compensated for sitting around for the longshoremen to perform their duties.
But you can’t just point the blame at one working demographic, because the Covid-19 impact also disrupted the flow of shipping containers. While cars are shipped on a roll-on/roll-off basis, the high premium for empty containers in Asia combined with docking backlogs have created a nightmarishly bullish scenario for car prices — possibly making SAH stock one of the best stocks to sidestep supply chain limitations.
Downwind Rumblings to Rev Up Sonic Automotive
Peruse YouTube videos and you’ll often hear pundits urge consumers to not give in to outrageous used-car prices. But the problem with this exhortation is that at some point, people do need transportation for both personal and professional endeavors. Those who have been holding out throughout 2020 and 2021 will almost inevitably be forced to surrender in the new year.
How come? According to a 2021 Wall Street Journal article, the “average age of vehicles on U.S. roadways rose to a record 12.1 years last year, as lofty prices and improved quality prompt owners to hold on to their cars longer.” To be fair, cars have become much more reliable, meaning “there’s still meat on the bone” for non-original owners.
Still, everything breaks down eventually. It’s also possible that once the Covid-19 crisis fades, the work-from-home experiment will also end due to telecommuting inefficiencies. That will add even more demand for personal vehicles, potentially bolstering SAH stock.
Is SAH Stock One of 2022’s Best Stocks?
If one segment in the broader automotive supply chain presented a positive outlook for SAH stock, I probably wouldn’t be so excited about it. However, throughout the supply chain, headwinds to retail distribution suggests car prices still have legs. In fact, J.D. Power reports that the used car market won’t stabilize until 2025, presenting a still risky but undeniably compelling opportunity.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.