Saturday, August 4, 2012

Investing In Ford

Buying an auto is a major purchase and now more than ever the American population has decided to hold on to their automobiles for a longer period of time, waiting longer to purchase a new car.  Out of the three major auto makers the only one to come out of the motor city without a bailout was Ford (F) it was the only company to emerge as a true symbol of Americana.  In November 2008 it traded at a low of $1.43 and started to pick up steam in 2009-10 at the same time General Motors (GM) was being delisted and restructured.  In January 2011 Ford hit a post-recession high of $18.97 doing what very few stocks ever do; a comeback from near zero territory.

Fast forward to 2012 the company trades at $9.09 and is having trouble delivering solid numbers overseas.  The Ford Focus has been a top seller with the U.S. market as well as abroad but the company has had a hard time selling the all electric Ford Focus which has seen very little demand.  In the second quarter Ford reported a 57% profit drop due to losses in Europe and Asia.  Ford predicts a strong operating profit despite the global slowdown although numbers will be lower than 2011.  In Europe alone Ford expects a $1 billion loss.  The automaker did beat Wall Street's forecast of 28 cents.  Without one time items, including the sale of two parts factories, earning 30 cents.  In North America Ford posted a $2 billion profit in the second quarter.  In South America the company saw its sales dwindle some of the fault can be attributed to higher tariffs.

Earlier this year Ford started paying dividends at 2.20% yield the company has a P/E ratio of 2.07.  General Motors currently trades at $20.04 with a P/E ratio of 7.16.  Price-to-earnings ratios in the single digits tend to be seen as good buys by investors.  Toyota Motor (TM) trades at $81.06 with a 1.20% dividend and a P/E ratio of 35.18.  Some investors see P/E ratios of 35 as an indicator that a stock may be overpriced.  In early summer 2010 Ford was trading at around $11 with a P/E ratio of about 9.  After reaching $18 in January 2011 Ford's price has dropped significantly seeing some major resistance at $13 and currently trading in the $9-$10 range for over 3 months. 

Ford and GM move in very similar direction that is to say that if an investor believes that Ford will go up in value so will GM and vice versa.  Before the Great Recession one could make money by pair trading F and GM whose prices moved together.  When the stock prices deviated an investor would short the winner and go long the loser as a form of arbitrage.  I do not see that opportunity with Ford and GM any longer.  Therefore I would not count on the two stocks following similar price patterns the same way they did in the past.  Ford could drop significantly while GM rises giving no short term opportunity to cash in.  Ford may continue to struggle a bit abroad and with the sales of electric cars, in the long run I believe Ford will grow and continue to be a true symbol of Americana.  What can be more American than a Ford Mustang?

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