Shares in Aston Martin (LSE: AML) have had some petrol in their tank lately. After a while treading water around the 50p mark, they crept up as high as 80p this week before falling back on Friday. There is definitely some momentum in the luxury carmaker’s shares. I think they could even reach 100p. But I won’t touch them with a bargepole – here I explain why.
Why Aston Martin shares have been climbing
The share price movement in the past few weeks has correlated with a broad move upwards in the London market. But I think Aston Martin has had its own appeal for many value investors. There’s been a swing back to value investing recently, with investors snapping up cheap shares in big names. It’s easy to see why investors might see Aston Martin shares as a good value play. It has a legendary brand, and serious financial backing from its executive chairman. Its low share price is less than a tenth of where it stood several years ago. Just looking at the chart, I can see why people would conclude that the only way is up.
But I’m an investor, not a trader. I don’t think it is a good strategy to pit one’s wits against the whole market in trying to predict the next movement on a share chart. Instead I prefer to take an investment approach, looking for companies with long-term growth and profit prospects. Like Warren Buffett’s mentor Benjamin Graham said, in the short-term, the market is a voting machine – but in the long-term, it’s a weighing machine.
No margin of safety
The short-term market movements have favoured Aston Martin shares. They could get to 100p in my opinion. But I don’t find the investment case attractive. The business has a lot of variables that could work against it, such as an uncertain demand for luxury cars in the recession and the success of its new SUV model. So, while the business could have upside, it could equally well have downside. Like Buffett, I prefer investing in businesses whose fundamental soundness provides a margin of safety.
But even if the business does well, that does not mean the shares will also do well. Aston Martin has taken on a lot of debt at high interest rates. Paying the debt down will be a higher priority than rewarding shareholders, especially if the business hits real problems. Meanwhile, the company has continued to issue new shares. That is positive for the business, as it helps shore up its capital position. But it’s bad for shareholders, as each new share that is issued dilutes their holding. The latest such move happened this week, with almost 475m new shares hitting the market. There are now more than 2bn Aston Martin shares in circulation. Aston Martin shares have already been heavily diluted in the past couple of years and I expect this to continue.
I think Aston Martin shares could hit 100p, but equally they could go back down to 50p or less. I see it as a trade, and I leave trading to the professionals. Instead I would prefer to invest in a company that isn’t diluting shareholders and has a compelling long-term growth story.