One of the most difficult things for an investor to do is to buy when a stock is up. Everyone loves a sale, and no one wants to pay full price.
When it comes to shopping, that makes sense. However, there are times when it comes to stock picking that one needs to pay full price. The reason is that stocks can continue moving up in price, which ends up being a situation in which the previous “full” price was actually a “sale” price.
Let’s talk about Ford Motor Co. (NYSE: F). Ford’s stock price has been on fire over the past year. Every time it moves higher, I hear people saying “yes, but I want to buy on a pullback” and it never comes.
Taking a look at the fundamental situation, readers who follow the market and the economic data already know that car sales are rocketing up. With vehicle sales moving up from approximately 10 million units in 2009 to 16 million units estimated for this year, that is a huge jump in demand.
Now that the Federal Reserve is keeping interest rates low for an extended period of time and not reducing their asset-purchase program, this is a positive to several sectors. Obviously, most vehicle buyers pay through financing, and lower rates are attractive there. But the housing recovery is also based on interest rates, and the more homes that are being built, the higher the number of pick-up trucks needed to work on various construction sites. Ford produces one of the top pick-up trucks in the industry with solid operating margins.
Ford has made massive changes since CEO Alan Mulally came to the helm. His leadership has been nothing short of extraordinary. Unfortunately, he will be leaving the company at some point, but the structural changes he made will last for many years.
The stock is trading at 10 times estimated 2014 earnings, which is quite attractive since we believe both revenue and earnings will exceed that figure. Another factor most people aren’t factoring is Europe. That continent has been extremely weak for many years, but over the past few months new data is showing that Europe is actually starting to pick up steam.
When investing, you have to know the existing situation and the potential catalysts. Ford is continuing to grow, yet the stock trades at an attractive multiple and offers a forward dividend yield of over 2%. With interest rates set to remain low around the world, we think the environment remains attractive for the company.
You don’t have to be an expert in technical analysis to know this chart is NOT one to short. While people are hesitant to buy at the highs, note that in early May the stock was also hitting a previous high point, which it quickly blew through.
Is a pullback possible?
Of course it is, considering the stock has almost doubled in one year. No stock can keep up that pace forever.
The key is to buy a stock without rushing into a trade. Also watch the trendline, because if that were to break, the stock would most likely drop to the 200 day moving average.
With a stock like Ford up so much, yes there is even more upside potential, but one has to be alert to any change in sentiment. With some investors up 70% over the past year, any sign of trouble and they’ll be headed for the exits. Trading Ford, as with all stocks, an investor needs an exit strategy and a stop loss.
This is a cursory look at Ford Motor Co. (NYSE: F) and we are not making any specific buy or sell recommendation but merely voicing our opinion of the current situation. Each individual investor must conduct their own due diligence of both the company, the market sector as well as their own financial situation and risk parameters.
Originally published on BehindWallStreet.com
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