Why the UAW Strike Could Boost Auto Stocks

Stock Market

The Big 3 is in a labor bind…and some investors are starting to bet against General Motors (NYSE:GM), Ford (NYSE:F) and Chrysler owner Stellantis (NYSE:STLA) as the United Auto Workers strike drags on.

Ford, GM and Stellantis are among the top 10 most shorted auto stocks as of Sept. 18, according to research from S3 Partners, a firm that tracks bearish bets on Wall Street. Ford is the third most shorted auto stock. GM is seventh and Stellantis is tenth. These stocks could become even bigger targets of short sellers if the strike doesn’t end soon.

“The length and severity of the UAW strike will be the driving force behind increased short selling in the Big 3,” said S3 analysts in a report.

“We should expect short selling to ramp up as the strike continues,” they added, noting that auto inventories could be affected. “Short selling will help grease the skids for downward stock price movement.”

But is a bet against the Big 3 a strategy that could backfire like an old truck engine?

Short Sellers Risk Squeeze With Auto Stocks

Heavily shorted stocks can occasionally rebound. In case you haven’t watched or read The Big Short in awhile, here’s a quick refresher on the mechanics of short selling that explains why.

When someone shorts a stock, they borrow the shares and sell them. The hope is that the investor can buy back the shares at a lower price after the stock price goes down, and then return them to the lender at that lower price. The short seller pockets the difference between the price they initially shorted the stock at and the price they bought back the shares to cover the position.

But here’s where things get interesting. If a shorted stock climbs higher, the short seller risks losing money if the borrowed stock keeps going up before they return the shares. That creates what is known as a short squeeze. Short sellers often have to quickly scoop up the stock they shorted before their losses mount. This buying pushes the stock price even higher. An eventual resolution to the UAW walkout could be a catalyst for a short squeeze.

“Once the strike is settled, we should expect a flood of buy-to-covers as autotruck production returns to normal levels,” the S3 analysts said.

Short sellers have already lost a chunk of money betting against the Big 3 this year. S3 said that Ford shorts are sitting on a 10% loss so far in 2023 while a Stellantis short position is 22% in the red. A GM short trade has gained less than 1% this year.

It’s worth noting though that shorts have been piling into auto stocks in general this year…and not just because of Detroit’s labor woes.

Several electric vehicle makers with no UAW workers (yet), including Tesla (NASDAQ:TSLA) and Rivian (NASDAQ:RIVN), have been bigger short targets this year than the Big 3. And investors have lost even more money on those trades. Shorting Tesla has led to a nearly 80% loss this year while a short position in Rivian is down more than 55%. Investors have also lost money this year shorting Chinese auto stocks Li (NASDAQ:LI) and XPeng (NYSE:XPEV) as well as the iconic sports car giant Ferrari (NYSE:RACE).

Short sellers seem to be missing the fact that demand remains strong for electric and traditional gas-guzzling vehicles…despite worries about the UAW strike, rising interest rates, higher oil and gas prices and other macro concerns. GM reported a nearly 20% increase in revenue during the second quarter, for example, while Tesla’s automotive sales surged an astonishing 49%.

So, betting against the auto industry right now may just be a lemon of an idea in general.

As of this writing, Paul R. La Monica did not hold (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.

Paul R. La Monica is a veteran financial journalist with nearly 30 years experience (including more than 20 at CNN) covering the stock market and other asset classes, the economy and other corporate and business news.

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