Stock of the day: Volkswagen shares clean up

VW shares have finally erased their Emissions-Gate losses

Rehab

Volkswagen shares have finally erased the catastrophic loss that followed the 2015 emissions scandal. It’s taken a little over two years. On Wednesday the stock finished scaling the 46.6% collapse between €162.40 and an—at the time—four-year low 0f €86.36. In the two years since that nadir, the group has = jettisoned a large cadre of senior executives under whose watch deceptive emissions software found its way into thousands of vehicles. Last month, VW added €2.5bn in provisions for the dozens of settlements it has faced and continues to face, having already set aside €22.6bn. Even so, the rehabilitation of the disgraced giant is clearly progressing. Last year saw closure on one of the largest and highest profile legal cases—one of a handful with U.S. authorities—with an agreement to spend $10bn on buying back affected vehicles or offering modifications to their owners free of charge, plus cash payments to current and former owners.

It’s not over

The backdrop of course is an erosion of reputability evident in VW’s gaping valuation discount to German carmakers. That will take many more years to fix. And the group’s persistent additions to provisions are also cautionary, as they imply VW only has a loose handle on the scale of its remaining exposure to further potential remediation.

Tech spec

VW shares back a fundamental return to health with many characteristics widely recognised as technically healthy. For one, whilst the stock may not have settled sustainably above its 200-day moving average, it has certainly now spent more time above the threshold since Emissions Gate than below. Additionally, a thinly tapering rising wedge stemming from two autumns ago is intact with the stock having tagged its upper limit without breaching its lower one. The shares have also completely filling the gap opened in those fateful days of September 2015 and then some. It’s interesting to note that whilst definitively overbought—see relative strength index sub-chart—incidences of deep transgressions of the RSI’s upper bound this year outnumber those on the lower bound (there have been none of the latter.) This points to an irrepressible aspect coming into price action and is almost certainly bullish. The stock certainly needs a rest now, as it is almost touching a 127.2% Fibonacci extension as well. Consolidation no lower than €146.82, erstwhile resistance for most of the year, is likely. Should that price break, it would be time to get a little less optimistic on the stock, though only a little.

Figure 1 - stock price chart: Volkswagen AG preference share (daily intervals)

Source: Thomson Reuters and City Index


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