Editor’s Note: My wife’s sister from Ohio is visiting us this week. She brings a Midwesterner’s sensibility to our laid-back beach vibe here on the Carolina coast.

Like a lot of people who don’t live near the ocean, she wonders why we would choose to move to an area that is certain to get hit by tropical storms on a regular basis. The catastrophic damage caused by Hurricane Helene in the western half of our state a few weeks ago is ample proof of that point.

Everything comes at a price. One of the costs of living along the coast is that you are periodically subjected to severe weather events. I’m willing to assume that risk in exchange for the benefits that comes with it, including the nearby beaches, mild winters, and southern hospitality.

I’m also willing to take a chance on a beaten down stock if I think it may soon rally. Unless the company is on the verge of going bankrupt, the remaining downside risk is usually dwarfed by the long-term upside potential, as I believe is the case for one major automaker.

Bad Numbers

You can’t screw things up much worse than Stellantis N.V. (NYSE: STLA) has this year. The automobile manufacturing holding company domiciled in the Netherlands has seen its share price drop in half since hitting an all-time high above $29 seven months ago.

To be sure, Stellantis deserves to feel some pain after posting disappointing results for the first half of this year. Those numbers included a nearly 50 percent drop in net profit on a 14 percent decrease in net revenues. Sales declines in North America and Europe accounted for nearly all of the shortfall in adjusted operating income.

Labor Pains

The third quarter isn’t shaping up any better. Last week, Stellantis released its Q3 sales in the United States that reflected a 20 percent drop in unit volume. However, that figure is a bit misleading since most of that decline can be attributed to the Chrysler and Dodge brand of vehicles while its Jeep and Ram brands increased sales during the quarter.

For that reason, Stellantis is aggressively offering discounts and rebates on its Chrysler and Dodge brands vehicles to reduce inventory. That will cut into profit margins, meaning the company’s Q3 net profit probably won’t be much better than previous quarter.

At the same time, Stellantis is embroiled in a labor dispute with the United Auto Workers (UAW) regarding a manufacturing plant in Illinois. It’s too soon to judge the odds of a strike or other event that could cost the company a lot of money, but Wall Street appears to already be pricing in an undesirable outcome for Stellantis.

Just One Catch

For all those reasons, there is a “catch a falling knife” aspect to this trade. The fundamentals are deteriorating while the technical indicators aren’t much help since Stellantis hasn’t traded this low in nearly two years. Nevertheless, its RSI (relative strength index) score of 28 suggests that STLA has become grossly oversold and should soon reverse direction.

Into the fray steps my PF Pro stock screener, which indicates Stellantis is undervalued given its forward earnings multiple of 4.1 and price-to-sales ratio of 0.2. Both of those multiples are roughly half the same metrics for their peer group.

Because Stellantis is a European company, it only reports semi-annual and annual financial results instead of quarterly. For that reason, there will be no formal Q3 results to consider other than the sales figures referenced above. That makes the timing of this trade difficult since it will be three more months until we see the annual results for 2024.

Trusting my Gut

I’m going with my gut on this one. The news couldn’t get much worse, so any good news could suddenly propel Stellantis considerably higher. Even if that doesn’t happen, an activist investor may challenge the company to improve its operating metrics by selling off underperforming brands and focusing on its biggest sellers.

All that aside, either you believe Stellantis will never recover from its current problems and go bankrupt, or you think it’s only a matter of time until the company has made the necessary corrections. I’m in the latter camp, and I believe the recovery in its share price could begin soon if a strike with the UAW can be averted.

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