Since the start of the year, Ford (NYSE:F) has increased around 8%. This increase in price comes in light of recent news about Ford's expansion into China as well as new business partnerships. Rather than studying the ramifications of the new developments of Ford Motor Company, I will instead quantitatively analyze the organization. For our purposes, quantitative analysis is simply testing financial relationships to see if intuitive economic rules hold merit in the past.
A History of Returns
In order to fundamentally analyze Ford, I have relied heavily on return on assets. Return on assets is the net income of the firm divided by average total assets across an operating cycle. The usefulness of examining return on assets is that it allows a researcher the ability to normalize profits in respect to the asset base required to generate the profits. By studying return on assets, we are able to understand how efficiently Ford is able to translate its entire base of vehicles, production facilities, and other assets into bottom line profit for the firm. The chart below shows five years of return on assets for Ford.
In the chart above, three distinct business periods can be seen. In the bullets below, we will explore these three periods and examine how price and economic performance are correlated. Beneath the analysis, a table shows a summary of these points.
- The first period for analysis is the time period from 2008 until the first quarter of 2009. This period was full of financial woes not only for Ford, but for the entire economy as a whole. The Great Recession reduced the profits of many organizations and Ford was no exception. During this time period, Ford operated at an accelerating loss and share price declined 72%. Ford's primary competitors received bailouts during this time period and the industry as a whole was threatened.
- The next period of analysis is the time period between the second quarter of 2009 and the first quarter of 2012. During this time period, Ford was able to emerge from economic malaise and the company was able to reverse its operating loss into a profit. The significance of this reversal is that the market tends to reward organizations with growing performance and Ford is no exception to this rule. During these quarters, Ford became more efficient at operating, as measured by return on assets, and share price rose 109%
- The final period of this analysis is the second quarter of 2012 to the first quarter of 2013. During this time period, Ford experienced share price gains to the magnitude of around 17%, but a troubling economic relationship began developing. Over the past year, Ford has experienced a sharp decrease in effectiveness, as measured by return on assets and yet share price has risen. Historically speaking, the market does not favor organizations with declining returns and I believe the decoupling between returns and share performance represents and investment opportunity.
The table below summarizes these points.
It can be seen in the table above, that a logical relationship has historically existed between firm performance and stock performance. Over the past five years, as Ford has bettered itself from a fundamental standpoint, the stock has risen. Conversely, as Ford has experienced a decrease in performance, shares have fallen. It is on the basis of this relationship that I believe that investors stand to profit by shorting Ford or selling exiting holdings. Ford's organizational returns have decreased by over 70% of its former value and yet price has continued its upward climb. It is my belief that the recent run-up in share price is a speculative frenzy associated with the asset bubble developing in the stock market fueled by return-hungry investors. I believe that investors have departed from using calculated reason in their decisions and are instead chasing prices in assets in which they perceive value. Historically speaking, Ford's share price has not departed from the firm's performance and I believe that ultimately, this time will not be different. For this reason, I believe that the decrease in firm performance and increase in share price represents an excellent shorting opportunity to capture prices as the market remembers the fundamentals of investment.
When investing in the financial markets, individuals can best position themselves to profit by relying on a mosaic of indicators. Through utilizing several different and distinct inputs, investors generate a more holistic analysis and perhaps increase the chances of profit. A method which I believe complements fundamental analysis of returns is seasonal analysis of price. The market tends to trade in cyclic patterns at different times of the year and an understanding of seasonality can help an investor better time his or her investment. Specifically, Ford exhibits seasonality in that in 51% of all May months, share price tends to decline. The chart below shows an examination of this seasonality.
It is important to immediately note that 51% of the time is marginal, yet meaningful. Since price only declines in 51% of historic Mays, this means that on average, you are slightly better off selling your shares for May and "going away." This number is given more meaning when viewed in light of the underlying fundamental condition of Ford. As previously explored, Ford is in a state of declining returns and historically this relationship has corresponded to decreases in share price. Given the fact that share price has actually increased during a period of economic decline, I believe that Ford will more than likely decline in the future and the above-average probability of decrease during May provides support to the fundamental thesis.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.