Since listing on the stock market in 2018, carmaker Aston Martin (LSE: AML) has been racy in all the wrong ways. Over that period, its shares have seen their value collapse by over 90%.
But here is the interesting thing. Very knowledgeable investors who understand the car industry have been piling in.
This week, it was announced that Chinese auto giant Geely would substantially increase its holding of Aston Martin shares. That will make it the firm’s third largest shareholder, with a 17% stake. Geely is paying a 45% premium to the Aston Martin share price the day before the deal was announced.
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German carmaker Mercedes-Benz is also a significant shareholder in Aston Martin. And the Saudi Arabian sovereign wealth fund has invested a substantial amount of money in Aston Martin over the past year.
I can buy Aston Martin shares on the open market for substantially less than Geely is paying. So should I make that move?
The role of ‘smart money’
Carmakers ought to understand their own industry. Geely and Mercedes are hugely successful organisations that I reckon have a good handle on what will happen in the industry – and how Aston Martin could fit into that.
Although the Saudi fund may lack that deep industry expertise, it too is a sophisticated investor with a staff of analysts who are paid to assess company prospects.
So when these types of investors decide to pile in in a big way, they are doing it for a reason. Clearly, they see some value in buying Aston Martin shares at the price they have paid.
However, each investor is different. Geely or Mercedes may benefit strategically from owning a stake in Aston Martin, no matter what happens to the share price. That rationale does not apply to me as a small private investor.
Meanwhile, the Saudi fund has clout as a big shareholder. Again, that does not apply to me. If Aston Martin proposes yet again to water down existing shareholders by issuing new shares – as it has done this week – there is nothing a small private shareholder could do to stop that happening.
Investment approach
My approach to investing is to buy shares that are valued substantially below what I think they are worth.
Aston Martin has a lot going for it. It is an iconic brand, has a well-heeled customer base, and recorded wholesale volume growth of 9% year-on-year in the first quarter.
But I do not like the economics of the consistently lossmaking business. In the first three months of the year alone, the company reported a £74m pre-tax deficit. That is an improvement on the same period last year, but it is still a lot of red ink. Net debt of £868m also looks high to me.
Owning Aston Martin shares in recent years has been highly lucrative for some investors. They more than tripled in price between November and March, for example. But the longer-term track record of value destruction does not appeal to me and I see ongoing risks.
The right move for Geely is not necessarily a smart move for me as a small private investor. I will not be buying.
