Shares of auto retailers suffered a broad and steep selloff Wednesday, after Morgan Stanley turned bearish on Penske Automotive Group Inc. and Sonic Auto Inc., while citing concerns over secular threats to the franchise dealer model the group leans on.
The six biggest losers within the SPDR S&P Retail exchange-traded fund
of the ETF’s 91 of 106 components that were declining, were the stocks of auto retailers.
was among those loss leaders, as it tumbled 10.4% toward a two-month low. It had closed at a record $113.61 on Oct. 25.
The automotive and commercial truck retailer was downgraded to underweight by Morgan Stanley analyst Adam Jonas. His $90 stock price target implies a further 10% downside from current levels.
Another big decliner was Sonic’s stock
which shed 8.6% toward a four-month low. Jonas also cut his rating to underweight, as his $40 stock price target was about 15% below current levels.
Of the franchise dealers he covers, three are now rated underweight, three are equal weight and none are overweight.
Among the XRT’s other biggest decliners, shares of Group 1 Automotive Inc. GPI took an 11.5% dive after closing at a record on Tuesday, AutoNation Inc. AN sank 9.7% after closing just shy of a record on Tuesday, Lithia Motors Inc. LAD tumbled 9.0% toward a 10-month low and Asbury Automotive Group Inc. ABG dropped 8.5% toward a 4 1/2-month low.
Jonas said turning bearish on Penske and Sonic, and the fact that he now skews to the downside on the whole group, is “a reflection of secular industry headwinds despite peak earnings.”
The individual downgrades and bearish lean on the sector comes after the overall group reported third-quarter results that expectations, with Penske and Sonic reporting record revenue, as supply shortages have helped drive up prices. Jonas suggested the group has reached “peak” earnings, given the market’s “muted” reaction to the strong results.
Jonas said he sees “the inability of legacy OEMs [original equipment manufacturers] to control the consumer experience in a direct-to-consumer model as one of the biggest threats to legacy OEMs over time — even bigger than the threat of electrification itself.”
Also, based on discussions with a “wide range” of electric vehicle OEMs, Jonas said he “does not expect to see any use the franchise dealer model.”
The SPDR retail ETF (XRT) pulled back 2.1% in afternoon trading Wednesday, after closing at a record on Tuesday.
The XRT has gained 9.5% over the past three months, while the S&P 500 index
has tacked on 5.4%.