A Stock Market Bubble in Car Companies?

No automaker's stock has climbed faster than Tesla's. But several have posted big gains in recent years. Is a bubble forming in autos? Source: Tesla Motors.

Is a bubble forming in automakers' stock prices?

It's certainly true that if we pick the right time frames to look at, some of the automakers have posted astounding returns recently. Ford is up almost 600% since the beginning of 2009. Toyota has more than doubled since the beginning of 2012. General Motors has nearly doubled since mid-2012, while Fiat Chrysler Automobiles has tripled over the last two years.

But is that evidence of a bubble in the sector? Or is something else going on?

It's not "irrational exuberance" if it was down for a reasonThis is one of those cases where we need to do a little analysis before we declare a trend. With each of the four companies I cited above, there's a story -- and those stories don't add up to a bubble. Instead, they turn out to be rebounds from adversity, exactly what fundamental-minded auto investors like to see.

A big bounce for the Blue OvalYes, Ford is up almost 600% since the beginning of 2009... when its stock fell to below $2 in the midst of the global economic crisis. New-car sales had cratered and it was clear to Wall Street that Ford's Detroit peers GM and Chrysler were doomed. As I said at the time, the price was best thought of as an option: If you think Ford might survive this mess, take a flyer.

A booming market for pickups is expected to drive strong sales of the new F-150 this year, and strong profits for Ford. Source: Ford Motor Company.

We all know how that worked out: Ford completed a wrenching restructuring and recovered nicely on the strength of a slew of great new products. In fact, with a price that's less than nine times Ford's expected 2015 earnings, the stock is arguably a bit cheap at the moment. Its multiple has been more like 10 in good times, historically.

A smooth recovery from a big embarrassment for ToyotaToyota's stock more than doubled since the beginning of 2012... rebounding nicely from the big hit its price took in the midst of a giant recall scandal a year earlier. Sensational media stories of "unintended acceleration" combined with the company's feet-dragging to create a big firestorm that hurt sales (and profits) and dented the company's reputation, in the U.S. and elsewhere.

Toyota's new hydrogen fuel-cell-powered Mirai sedan shows that the automaker hasn't lost its green-tech edge. Source: Toyota.

But that's all in the past. These days, Toyota is booking record profits on rising sales and favorable exchange rates, and its reputation for safety, efficiency, and environmental awareness is as strong as ever. No wonder the stock is up -- but again, it's not up that far: A little over 13 times earnings is a fair price for Toyota's strong credit rating and dominant position in its home market.

GM is getting on trackGM has nearly doubled since mid-2012 ... when the stock took a big dip, after some stumbles by then-CEO Dan Akerson and lingering troubles abroad led investors to worry that the General might be gearing up for a second trip to bankruptcy court. But three years later, GM looks a whole lot different, with strong products that have surprised critics, a "fortress" balance sheet, and an all-business executive suite led by sharp CEO Mary Barra.

GM is investing $12 billion in an effort to boost Cadillac -- and its global bottom line -- in a big way. The new CT6 sedan is a key part of that effort. Source: General Motors Co.

Barra's team has big growth plans, and they make good sense: At seven times expected 2015 earnings, and with a dividend yield over 3%, the General's stock might actually be a steal.

The Fiat-Chrysler mashup has turned into an intriguing company Italian automaker Fiat was essentially handed bankrupt Chrysler for free, and few investors took him seriously when CEO Sergio Marchionne explained how well the matchup could work. But the story is a sunnier one now: FCA still has a long way to go to match its peers' quality and profitability, but its progress has been undeniable -- and sales growth has been strong.

Fiat's overhaul of Chrysler included relaunching tired old Dodge as a hot performance brand. The tire-shredding Challenger SRT Hellcat got that effort started last year in high-powered style. Source: Fiat Chrysler.

Given the work that remains to be done, FCA shares might be a little expensive at just over 11 times expected 2015 earnings -- but it's hardly a bubble stock. In fact, if Marchionne can keep working his magic, it might turn out to be a fine entry price.

Tesla might look bubbly, but again, there's a story At just over $200 a share, Tesla Motors is sporting a very rich valuation that isn't close to being supported by the feisty Silicon Valley automaker's sales or revenues so far. But while there's a strong case to be made that Tesla shares are due for a fall, the reason for Tesla's high price is easy to see: There's a whole lot of investor excitement about the potential for Tesla's growth over the next few years. And Tesla's impressive success to date makes that excitement (and that sky-high price) seem justified to many.

But there is a reason to be concerned about the automakersSetting aside Tesla, the four big automakers discussed above -- and most of the other automakers you might consider investing in -- are heavily dependent on the strength of the U.S. new-vehicle market.

Right now, it's quite strong. In fact, it's probably near a peak, or at least a plateau. But it moves in cycles, up and down with the rhythms of the U.S. economy. As it rises, so do automakers' profits in North America -- and when it falls, so do those earnings.

Auto investors need to be keenly aware of economic cycles and their effects on new-car sales. But while we may be at or near the top of a cycle, one that has pushed profits and stock prices up, that's a whole lot different from a bubble in auto stocks.

The article A Stock Market Bubble in Car Companies? originally appeared on Fool.com.

John Rosevear owns shares of Ford and General Motors. The Motley Fool recommends Ford, General Motors, and Tesla Motors. The Motley Fool owns shares of Ford and Tesla Motors. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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