Why Ford and GM gains can continue to accelerate

For the past year, the one name that has dominated gains within the autos sector has been Tesla. However, this week saw Ford rally 17% and GM bounce 11%, and reminded us that investors can still find significant opportunities outside of Musk HQ.

Both stocks are now up over 30% this year already making it their best start to a year since 1987. The reason? Simply put, investors are starting to get very excited over their shift from being traditional car manufacturers towards becoming big players within the electric-vehicle and autonomous-vehicle space.

On Tuesday, GM announced the investment from Microsoft in its Cruise autonomous-driving company that GM acquired in 2016 - one that sees GM keeping a 70% stake and values the deal at about $30 billion.

Ford also received a valuation bump from news that its investment in Rivian - an electric-pickup-truck manufacturer - took in $2.7 billion. Although Ford only owns 10-15% of the company, their stake could be as much as $2-3 billion.

Both deals were met with excitement from investors but also from analysts covering the stock. Deutsche Bank released a note stating that they see near-term catalysts for both names given further expected updates on their EV and autonomous vehicle plans.

JP Morgan are also bullish on both names as analyst Ryan Brinkman raised his price target on GM to $63 - indicating 14% upside from Friday's close. Brinkman also upgraded Ford to Buy from Neutral based its new products such as the Mustang Mach-E all-electric crossover vehicle, which he expected to generate strong demand and improve the product mix.

These deals are helping to change the ways that investors view these companies. Many have for a long-term struggled to see how earnings could grow given the threat of electric vehicles and the rise and dominance of Tesla. The conversation is likely to grow as to whether these auto names should also be viewed as technology leaders.

From a valuation perspective, GM trades at 9 times 2021 earnings whilst Ford trades at 11 times. With the S&P trading at over 20x earnings, there is still plenty of potential upside for the stocks should investors believe there is genuine long-term growth potential with the EV and autonomous space.

As much as the market has fallen in love with EV stocks, investors will now be waiting to see tangible evidence on the progress going forward, not just positive announcements. Ford and GM have now captured the attention of many new investors and those who had shunned them in the past are having to reevaluate their growth and earnings potential.

Whilst the progress on the new models such as Ford's Mustang-E and GM's Hummer will be watched closely with success likely to be reflected in the stock prices, one must not forget there is still the opportunity for improving profits as auto-sales demand continues to rebound from the pandemic lows.

It may not continue to be full acceleration ahead for Ford and GM, but the gear shifts look to be heading in the right direction.