Volkswagen's battered shares pose the same risks for traders as BP's oil spill in 2010, which also threw up tempting trading opportunities but burnt investors who got their bets wrong. Volkswagen's stock has slumped some 30 percent since the US Environmental Protection Agency said last week that the company could face penalties of up to $18 billion for cheating on emissions tests on some of its diesel cars.
Several traditional fund managers, who invest in assets on a time frame of two to three years or longer, reckoned VW shares had already fallen down to such an extent that the stock was bound to bounce back further down the road. Brokerage Bernstein wrote this week that even though the situation was serious, "the reality is VW will recover from this". Yet others were more cautious and Deutsche Bank described the matter as an "investor's nightmare".
For many who bought BP shares shortly after news of the Gulf of Mexico oil spill broke in April 2010, it's a case of 'once bitten, twice shy'. BP's stock has roughly halved in value since then. "I got burnt on BP in 2010 because I initially bought it on the dips. So with Volkswagen, I would suggest going short and selling every time Volkswagen rallies," said Beaufort Securities' sales trader Basil Petrides. One problem with BP was estimating the legal costs of its problems with US authorities after the oil spill. When BP's shares fell immediately after the well blow-out, several analysts said it was a buying opportunity. A week after the blast, Goldman Sachs wrote: "We believe this reaction is overdone."
More than a fortnight after the accident, Exane BNP Paribas said "BP's $30 billion market value decline is excessive" and that a $10 billion provision would be fair. Yet, BP's final bill is now expected to top $60 billion, and for a three-month period as the well leaked, analysts struggled to assess the impact and amend their forecasts. VW and BP are just two examples of major corporate mishaps, but the past 15 years have been scarred by other debacles which led to rapid declines in the shares of companies.
Fund managers and traders said there were several ways to best handle situations such as VW or the BP spill. Paul Mumford, fund manager at Cavendish Asset Management, said it was vital that no single stock represented too big a holding in a fund, so that if that stock collapsed, the entire fund did not go down with it. SVM Asset Management's Colin McLean said another tactic entailed buying shares in rival companies which could come out looking better if their competitor got embroiled in a corporate violation.
Mumford said he had bought shares in British engineering group Senior Plc, Its diesel technologies help carmakers to meet emissions standards, and the VW affair could make its business all the more important for such companies, said Mumford. Timing and speed of movement, rather than fundamental evaluation, is everything when playing a rapid share price slump such as VW or BP in 2010, said dealers.
Admiral Markets' Darren Sinden said those with "short" positions betting on further declines in VW could get caught out if rival carmakers made a bid for VW, or if Porsche bid for more control of the VW company in which it has a stake. Phoebus Theologites, co-founder of SteppenWolf Capital, also said "shorting" VW shares was too risky at present, and favoured instead trading the credit default swaps (CDS) of European car stocks, in case VW's problems spread to its rivals. Further risks stemmed from trading in VW bonds impacting how the company's stock performed.
All of those contacted by Reuters said trying to call a bottom to VW's stock price and trying to predict when its problems would ease off was a bet not worth taking. "The way I view these things is that even the biggest of companies can get unstuck," said Mumford.
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