Ford (F) is a great company and I've made a lot of money by investing in this company. I absolutely love the transition of the company in the last 4 years or so, and I have full faith in the management. On the other hand, the investors of Ford have been pretty timid in the last couple years and this led to sell offs whenever the investors were concerned about the company's future.
In fact, it almost worked like clockwork in the recent years. In the summer of 2010, Ford traded for roughly $10. In the second half of the year, the company had a rally and the share price moved up to $18. By next summer, Ford's share price fell down to $9.67. Again, the company saw a rally in the winter, carrying the share price up to $13. In the summer of 2012, the share price plunged again and fell below $9.00 for the first time in years. In the winter of 2012, the share price is up again and it is ready to reach $14.00. Do you see a pattern? Ford experiences a plunge in the spring-summer and a rally in the fall-winter.
What is funnier is the investor and analyst reactions to all this. Right after Ford has a massive rally, everyone upgrades the company and the price targets start skyrocketing. Similarly, right after Ford has a plunge, everyone downgrades the company and the price targets start plummeting. This never fails.
Last summer, I put my money where my mouth was and bought a bunch of Ford shares under $9.00. As I said in that article, it was time to back the truck up and load up on Ford shares. Now that Ford has its traditional winter rally, where will it go from here? Will Ford break the pattern and keep going up towards spring and summer, or will it return back to its pattern?
I think the answer depends on the investors and their sentiment. As much as Ford goes, sentiment seems to play a much larger role than fundamentals. Two years ago, it was Greece. Last year, it was Italy and Spain and this year, it was the fiscal cliff of the good old USA. For the time being, there aren't any visible sources of short term concern for Ford and the company might actually continue its rally. On the other hand, the stock market is rarely rational in the short term.
Ford and GM (GM) expect that slightly more than 15 million new cars will find owners in the US in the year of 2013. This is up from the 14.5 million new cars that were sold in 2012. In 2011, the number of cars sold in the US was 12.78 million. The car sale figures are still below the pre-recession levels when the annual numbers were as high as 17 million. The North American market is particularly hot for SUVs and small trucks. It looks like as cars and small trucks get more fuel efficient, more people want to own them. A lot of people who were afraid to buy an SUV or truck because of gas costs are rethinking their decision of not buying one. Furthermore, the housing recovery might also play a role in the improvement of truck sales because house owners are more likely to own trucks than renters, because they may need a truck for some of the maintenance tasks.
Once again, the big three car companies in Detroit are gaining market share in the US. Last year, the combined market share of these three companies in the US was 44.5%. This year, these companies enjoy a combined market share of 46.9%. Apart from the companies in Detroit, Japanese, Korean and German companies are some of the major players in the car industry.
Ford is doing a good job of paying off its debt while maintaining large cash reserves. The company's debt levels will never come near zero because a lot of the debt actually belongs to Ford Finance, which is the entity that finds loans to people who buy cars from Ford. At the moment, the delinquency rate of these loans is below 2%, which doesn't worry me at all.
Apart from the huge one-time tax benefit Ford enjoyed, the company's price to earnings ratio will be around 10 for the next couple years. If we exclude the $32 billion of cash reserves, the price to earnings ratio falls to 5, which indicates that Ford is still undervalued.
In the medium term, Ford will continue to be volatile and the company might trade within a range. This doesn't mean Ford is a bad company though. I would buy on the dip and sell on the top. While it is usually a difficult task to identify dips and tops in stocks, Ford's trending has been very consistent in the recent years. Ford is pulling the exact opposite of "sell in May and go away" philosophy. The company performs better between the summer and the winter.
Currently, if you already own Ford shares, it is ok to hold onto them, just as much as it is ok to take profits. If you don't already own any Ford shares, I wouldn't initiate a position after the shares enjoyed a massive rally in the recent months. I would wait until summer and initiate a position then.
Disclosure: I am long F.