Ford: Kerkorian's Loss Could Be Your Win

Sometimes you have to wonder what goes through the head of some of the world’s most renowned investors. Is it possible that billionaires make emotional moves just like so many other everyday investors?

While billionaires certainly make the same mistakes you and I make. I do not think that is the case with Kirk Kerkorian.

After shelling out a billion dollars to get his hands on a 6.5% stake of Ford (NYSE:F), Kerkorian and his investment vehicle, Tracinda, are backing away from their stance.

On Monday, Tracinda unloaded over seven million shares of the troubled automaker for $2.43 per share. Yesterday, it announced that it is looking to possibly sell the remaining 133 million shares.

Now that the Street is on to Kerkorian’s plans, Tracinda will be lucky to sell its shares at a price anywhere close to yesterday’s figure. Shares are already down by about 3% on the news.

Kerkorian is taking a severe loss on this billion-dollar investment. After all, he paid as much as $8.50 per share for a large chunk of the shares. Right now, his losses are strictly limited to paper, but as soon as he puts in those sell orders, he will be locking in hundreds of millions of dollars in losses.

A lesson to learn

So why is Kerkorian willing to unload when shares of Ford are selling so cheaply? He claims he has changed his investment strategy and is looking to reallocate his money to other sectors of the economy that he believes hold value. Chiefly, he is looking to invest in gaming, hospitality, and the oil and natural gas sectors.

Moving money into the gaming sector is no surprise. After all Kerkorian made much of his fortune from the growth explosion in Las Vegas. He even married a former Vegas dancer, for Pete’s sake.

Really, Kerkorian’s move offers a good lesson to investors. Sometimes it is better to take your losses and move on.

In this case, the billionaire realizes his position in Ford will not turn profitable overnight. He would rather put his ego aside, take the losses, and move his money into a position he is familiar with and is likely to make back his losses. Sometimes you just have to cut and run.

Now, for you folks thinking that Kerkorian is crazy to abandon Ford at these levels, you are right. Shares of the company are dirt-cheap. If you can get in at today’s price, you have a great shot at profits.

But if you got in at over $8 like Kerkorian, and expect to see profits, you will be sorely disappointed. The automaker will not increase in value by 300% anytime soon.

A move of 50% or more, however, could very well be in the cards. That means if you buy those shares Kerkorian is looking to unload, you could have a significant shot at profits.

Just like many other aspects of the investing world, profit potential is a matter of perspective. Chances this billionaire sees things a bit differently than the average investor.

Comments

[rh13:]

A good article. We don't know what Kerkorian is thinking, or even why he is thinking it.
One possibility is this: Consolidations and sales are being considered in the automobile industry. Maybe Kerkorian wanted to send a signal that he would not interfere with a sale or merger. If that were to happen, it would probably be good for his investment, particularly in the short term.
He hasn't sold a lot of his stock in Ford. He said he is considering selling all of it, but he did not say he would, or when.
Also, maybe he just got stretched thin and had to sell something. I don't know what else he might have in mind.
I haven't changed my mind about Ford. I think it is risky, but likely to pay off very well from its current levels. The current radical sales slump is probably due to the financial market freeze, and that will likely be corrected soon, especially for cars. Cars follow fairly predictable value patterns, notwithstanding the recent experience with SUV's. People aren't going to quit driving. They usually don't even cut down driving very much.

2008 Oct 22 10:56 AM