The auto industry has been very bullish for a few months and I attempted to take advantage of that when I looked at Ford. I last visited Ford (F) at the end of November when it was very bullish. I enjoy combining long-term investing and short-term income strategies and made a short-term income suggestion with Ford that went in my favor. But I did not give it enough time for the option play to take place. Here is the original suggestion I made:
The Options Play
The stock is presently trading at 11.14 and I believe the next few months will give the stock an opportunity to move up. Since option prices for Ford are so reasonable, the short-term income play would be a simple straight options buy.
- Buy the December 2012 call with a strike of '12' priced at $0.04
- Net Debit to Start: $0.04
- Maximum Profit: unlimited
- Maximum Risk: net debit
- Maximum Length of Trade: 1 month
Reasoning behind the Trade
- Trade with the trend.
- Ford's North American & China sales will carry the company in 2013.
The trade suggestion was correct, but the timing was wrong. The stock did not continue to move up until just before Christmas after the option had expired. I have since then taken the position that I should give these types of plays a minimum of two months to account for time decay. If had taken that position to begin with and held on to the January 2013 "12" call option, today it would be worth $1.51 when it was originally bought for $0.04. You do the math on that one!
Ford continues to move up. How long will it continue? What is the company looking at in 2013? The recent move up has been due to excellent sales reports for the company. For the year, it showed sales of 2.25 million vehicles, that was a 4.7% increase over the year before. Ken Czubay, VP of marketing in the United States attributed part of the success to the hybrids and fuel efficient cars. He states:
"Ford's fuel-efficient cars and hybrid vehicles showed the most dramatic growth for the year, and we achieved our best year for commercial vehicle sales since 2008."
Ford isn't the only car company that ended the year well.
General Motors (GM) sold 2.7 million for the year, up 3.7% over 2011. Automobile sales increased 13.5 percent in 2012 to their highest level since the recession started. If investors are looking to make money with any of the automakers, GM may be one company to look at. It saw its greatest monthly gain in 5 years in December at 5% (year-over-year). The company also has enticing P/E numbers to back up its impressive record; the Trailing P/E is 11.21, and the Forward P/E is 7.58.
Auto Sales Forecast for 2013
Auto sales as a whole are expected to continue to positively grow in 2013 but it may not grow as fast as it has in recent years. The increase is expected to be about 4% over 2012. Sales will not grow as fast as auto dealers would like because of continued fiscal issues here and the effects of global economic slowdowns. So many consumers have had pent-up demand for new vehicles for so long, that the slow (but positive) US economic recovery has gotten people buying now and the momentum will carry into 2013.
I would like to throw out a word of caution. As positive as things appear, they could turn ugly just as fast. Even though the Feds have a plan in place and the European Central Bank promotes investing to trigger growth, it is unknown if these things will work. Previous plans have been questioned as to their effectiveness. Since the 2013 recovery is expected to remain sluggish, it is quite possible that downside risk for auto sales growth could be a real factor.
Ford really shot up in December with the good news of yearly sales numbers. I like the increase in value, but the increase was so steep, I do not believe the company can continue to see it go up like that. The RSI is extremely over bought, so I am expecting a short-term pullback to take place. I am still bullish on the stock but I would expect a pullback to come soon. GM looks the same way. The stock looks like it will remain bullish, but I would expect a pullback first. Investing in these two companies or most other automakers will come with unknown risk in 2013 and a lot of it depends on how the economic recovery unfolds.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.