Honda Will Benefit from GM, Chrysler in Trouble

04/02/09 Categories: Stock Investing and Investments

Lately, the media has been focused on what is going to happen to some of America’s biggest business icons: GM and Chrysler

While there’s nothing wrong with that, my mind always has “the wheels turning” and wondering how I can profit from what’s going on in the media. So many people watch the news for everything from “entertainment to information”. However, I watch it to derive an investing idea out of it.

With the focal point being on a GM/Chrysler bankruptcy, their bleeding and “wheel spinning”, it gives the CEO of Honda and other Asian automakers (and even Korean automakers like Hyundai) an edge at this time.

As the auto industry got hit from the global slow down, GM (GM), Ford (F) and Chrysler took it on the chin the worst. However, Honda, Toyota and Mazda had something haunting them too…it was the strong yen. As the yen rose, it eroded their profits even more.

However, lately the Asian automaker stocks (symbols: HMC, TM) have stabilized. Why? If your main competitors aren’t “breathing down your neck” and they are “licking their wounds” and trying to just stay afloat, that gives you an advantage that you didn’t have before.

If the yen was unusually strong before (USD/JPY exchange rate was at 87.00 but is now closer to 99.00 on a weaker yen), and it’s much weaker now…then that helps them as well.

So coupling a weaker yen with a potential GM/Chrysler bankruptcy....that equals great advantages for Honda and its shareholders.

Therefore, it doesn’t even matter whether GM and Chrysler go into bankruptcy for Honda to keep that advantage. Either way, it’s going to take them time to regroup and to get back on track. All the time that it takes them to do this (and it will take a while with a new CEO, etc.), will give Honda a great “lead time” over Detroit once again.

As stocks stabilize and turn upward as we come out of the recession (finally) in the upcoming months, the yen will weaken materially. This will give Honda and Toyota a “wind to their back”.

All of this combined will get the Asian automakers a boost in the next 12 to 36 months. Those that realize this now and buy stocks like Honda while its price is still cheap could see gains of 50% or more in that time. See the chart below.

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Honda could gain 50% in the next 1-3 years from these levels!

Keep in mind that this is an “investment idea” and so it shouldn’t be a “margined trade”. I say that because it will take “time” for this to occur and margin interest would eat you alive. Also, if the stock did retest its lows in the short run, it would eat up your account balance. If you have bought with cash and plan on holding for years, then this won’t matter.

Bottom line: Detroit’s loss is Asia/South Korea’s gain. The weakening won in Korea and the recently weakening yen in Japan will also work in these automaker’s favor.

An investor can take advantage of this in a couple of ways. They can buy Asian automakers that trade on U.S. exchanges like Honda (HMC) and Toyota (TM) and they can also buy currency pairs in the forex market that take advantage of a weakening yen (like USD/JPY and EUR/JPY).

If buying USD/JPY or EUR/JPY, it might be best to allow them to solidly trade and close above their 200 Simple Moving Averages. (Find out more about moving averages and other technical/chart reading techniques here).

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