Some investors can get carried away with an emotional attachment to a firm they’ve invested in. Aston Martin Lagonda (LSE: AML) is a classic example in this regard. Despite the Aston Martin share price falling around 90% from the IPO price in 2018, there’s a strong attachment to buying and holding the stock. You can put this down to the beauty of the cars made, or the lifestyle that the brand symbolises. But with a looming second stock market crash, what’s the best plan?
A potential second stock market crash?
There are two elements that we want to look at. The first one is the possibility of a second stock market crash. This is important, because it has a causal relationship with the Aston Martin share price. For example, the recent rally in stock markets since the March drop has seen 93 out of 100 stocks in the FTSE 100 register gains. So it’s logical to think that Aston (along with many others) would get caught up in a fall if the overall market turned sour.
The argument for a looming crash is based on the disconnect between the rallying stock market and the poor economic data. Take the UK GDP reading for April. Year on year, the figure fell by 20.4%! Also, the claimant unemployment rate has doubled in just two months (from 3.5% to 7.8%). These are worrying signs for the economy, yet the FTSE 100 has been rallying higher and higher. At some point something has got to give.
What happens then to the Aston Martin share price?
Past performance does not always indicate future returns, but it does give us an indication of what could happen. During the first stock market crash, the FTSE 100 index fell around 32%. In comparison, the Aston Martin share price fell around 60%. So from this we can say that the share price has a high beta. The beta of a stock measures the sensitivity of the movement in the share price in comparison to the broader market. A beta of 1 means the stock moves exactly as the market does.
From the above, we could conclude that a second stock market crash would likely see the share price for Aston fall more than the index average. This would make sense, given that the firm manufactures expensive luxury cars. If the crash coincides with the UK entering a recession, then the demand for such cars should fall heavily. When you add into the picture Aston’s net debt of around £875m, trying to service such debt during a downturn will be particularly hard.
Don’t get me wrong, I do think that the Aston share price will reach a point where it’ll become a screaming buy for investors. But given that the odds look like we could have a second drop, Aston’s high beta is worrying. This should see the share price fall by more than the market average. So while the stock looks cheap at 71p, I’d be patient and wait to buy at lower levels in the future. In the meantime, here are two stocks I think could rally despite a potential market crash.
The post Stock market crash, round 2: What could happen to the Aston Martin share price? appeared first on The Motley Fool UK.
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Jonathan Smith and The Motley Fool UK have no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
Motley Fool UK 2020