It has been a stellar six months for the automotive giant, Ford (NYSE:F). I was a huge call-buyer in December, when the stock was around $11 and the daily trading volume was about double its three month average for a week or two. The stock is now almost at $16 and I have been investing in the company for the long-term since cashing out my options positions in early-2013.
Where has the catalyst come from though? The obvious thing holding the stock back is Europe. So as things in Europe get better, so does the stock price for Ford. The obvious successes in domestic sales have showed that the company is doing great and China sales have showed rapid growth, despite only making up a small amount of revenues (roughly 2%).
But losses continue to pile up from Europe and unfortunately, it's not a quick fix. Alan Mulally, CEO of Ford, has outlined a goal to achieve breakeven in Europe by mid-decade. Whether or not Ford can get there, we don't know yet. They still have over two and half years until 2015 to see if they can accomplish this feat or not.
With many thinking Europe has bottomed -- or is at least close to bottoming -- then perhaps Ford can reach breakeven by then. In 2012 Ford lost about $2 billion in Europe. In the first quarter of 2013, it lost roughly $460 million. That isn't exactly great, but a lot of it is attributed to shutting down plants as well and the fact that labor laws in Europe are much more stringent.
So again, why the rally? Well I think investors are starting to realize that Ford has some serious earnings power and that, if Mulally is correct, will be making some serious coin in a year and half. I think the sentiment has shifted and many believe that Europe is stabilizing.
Just because Europe stabilizes doesn't mean it automatically warrants Ford's success though. But, if the recovery can begin soon, investors are hopeful that European sales will be much like domestic sales when the U.S. came back from its recession.
For some insight, the number one selling vehicle in the world last year was the Ford Focus for the second year in a row. The third top selling vehicle, again in the world, was the Ford F-series pickup truck and in sixth was the Ford Fiesta. So in worldwide auto sales, Ford had three models in the top ten, more than any other automaker. That bodes well for the optimistic investor.
The great thing about Ford is that the shares can go to $20. But I don't think they will, yet. Investors and traders tend to price things in the future. Meaning that if they see things being fixed six months from now, they start pricing it. That's how you get some of the tech companies with a P/E ratio in the hundreds or thousands. (That's not to say I think European operations will be fixed in six months. The time frame is only used as an example).
When Ford fixes its European operation, it will generate some serious cash flow and have some strong earnings power. But until then, investors have (and had) plenty of time to load up. Each time it gets higher, I try and use the previous dollar level to justify buying. For instance, when the stock was flirting with $15, I would say, "I'll set up my buying to purchase anywhere in the $14-range."
But then the stock pushes higher, and so does the buying. Now I'm looking to buy below $15, but with the recent gap up on Tuesday and the follow through on Wednesday and Thursday, it might be hard to buy below $15 for a little while.
Ford became a much more lucrative investment with its dividend. They wanted to be absolutely sure that they could continue to pay the dividend even in the harshest conditions before reinstating it.
Management also wanted the same circumstances to hold true before raising it. They didn't want to raise it, only to have to reduce or cut it in the future. That made shareholders very comfortable with the fact that Ford would be able to continue its payouts when the dividend was doubled in January.
Even after its big run, the stock still yields 2.5%, which is pretty good for a lot of investors. The stock was a lot closer to a 3% yield before it went on this recent tear. But even so, if the stock is headed to $20 or higher, then buying shares with a cost basis near $15 makes a lot of sense. It would represent a 33% return if the stock got to $20 by 2015, and that's not including dividends.
My plan will be to continue adding shares on a monthly basis, while enhancing and/or protecting the position with options. Right now I am protecting and looking to sell the June $16 calls for $0.40 or more, which was achieved early Thursday morning. If my shares get called away, I'll recreate my position on a dip.
If Ford has a decent pullback in the next couple of days or weeks, I'll look to exit my short covered call position for a slight gain. For me, I am short-term bearish and long-term bullish on Ford. Investors may be excited, but shares are currently overbought.
Disclosure: I am long F. 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.