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The Discounted Stocks BlackRock Likes? Automobile and Healthcare Companies.
Multiples in the auto industry are “deeply depressed,” according to Tony DeSpirito, global chief investment officer of Fundamental Equities at BlackRock.
Leaders of BlackRock met with journalists this week to discuss the asset manager’s two new active ETFs and the state of markets. One also shared two sectors he says are primed for investment: automobile manufacturers and healthcare.
The multiples that auto companies currently trade at are “deeply depressed,” said Tony DeSpirito, global chief investment officer of Fundamental Equities at BlackRock. DeSpirito also is lead portfolio manager of BlackRock’s equity dividend and value portfolios, including the BlackRock Large Cap Value ETF (BLCV) the firm launched on Tuesday.
U.S. auto manufacturers are trading at an average of 5.9 times their price-to-earnings ratio, compared to 9.8 — the average ratio over the last 10 years. The average auto sales seasonally adjusted annual rate, or SAAR, during the last 10 years was 16.1 million vehicles. After trending by as much as two million vehicles above the average each year since 2013, sales dropped dramatically in 2020 during the COVID-19 pandemic. Sales rebounded well above average again at the start of 2021, but have since fallen and remain below average, at a SAAR of 13.3 million.
Auto sales have been depressed because of computer chip shortages, DeSpirito said, a problem that stemmed from manufacturing and shipping delays during the height of the pandemic.
“There’s a lot of robust demand for autos, but they just haven’t been able to produce them. And the longer you’re selling below normal, the more pent up demand is, which helps build resiliency,” DeSpirito said.
The U.S. sold about 20 percent fewer vehicles in 2022 than in a typical year. “This was entirely due to the challenges facing the increasingly fragile supply chain,” said Eli Horton, ETF portfolio manager at Engine No. 1, an activist investment firm.
Engine No. 1 believes GM — which is trading at just five times its price-to-earnings ratio — will be an especially good investment among companies with “very cheap valuations on an absolute basis and relative to history.”
“We look at GM as fitting into a classic fact pattern which is that the market really struggles to understand and determine the outcomes of change on a multi-year basis. The transition to electric won’t be a straight, smooth line but GM has made the right strategic decisions like building its Ultium EV platform and entering into critical supply agreements for key battery materials,” Horton said.
Cost structures at auto companies have also become much more flexible than they were during the last recession in 2008 because their labor contracts have changed, DeSpirito said. “When I look at it, I say, wow, there’s a lot of opportunity and quality and value,” he added.
BlackRock is also finding good investment opportunities in healthcare companies, which have a long-term trend as a tailwind.
“We’re aging as a society and, as you get older, you can consume more healthcare. So we have a demand forecast that’s pretty robust. It’s also an incredibly resilient sector when it comes to recession,” DeSpirito said.
Since 1980, healthcare has been the most resilient earnings growth sector through recessions, according to BlackRock.
DeSpirito explained that one might anticipate that the price of companies in resilient sectors would be bid up right now. But that hasn’t been the case for all of them. Healthcare remains one of the cheapest, he said.
“Healthcare is a need that isn’t going away. The aging population is bringing in more costs from chronic conditions, hospitalizations, and drugs, and we’re seeing greater utilization in general,” Andrew Adams, co-founder and managing partner at Oak HC/FT, a venture and growth equity firm that invests in healthcare companies.
“This also means more costs to the system, creating an opportunity to drive transformation across the space that drives quality clinical results, improve the patient experience and make administration more efficient to all stakeholders,” he said.