I have stepped to the sidelines regarding Ford (F) prior to upcoming earnings due to the fact I see this as a 'buy the rumor, sell the news' earnings event. The stock has been on a major run year-to-date. The run has been based on great news regarding current auto sales. Nevertheless, the stock is up 30% for the year with all of it coming the last three months. In the following sections, I will lay out my case for taking a 'wait and see' approach regarding upcoming earnings. The charts and tables were provided by Finviz and Scottrade.
Buy the rumor sell the news phenomenon
The buy the rumor, sell the news phenomenon occurs all the time in the markets today. Investors buy up stocks based on what they believe will happen in a given earnings report, economic event or new product release (the rumor). After the event transpires or the report is released (the news), they dump their positions and the stock moves lower. These buy the rumor sell the news spectacles often apply to earnings. It seems Ford may be experiencing this effect.
What happens is the stock rallies hard into earnings. The rally occurs because investors are emboldened by the rumors their favorite stock -- Ford in this case -- is going to hit it out of the park in regards to exceeding earnings estimates or has new products on the horizon that are a sure thing to be successful and are revolutionary. The buying prior to the earnings announcement runs the stock up to the recent highs, leaving it vulnerable to profit-taking once the actual earnings are reported.
Now, this is only one of three possible scenarios, although it is the most likely outcome. A second occurrence, which has an even more devastating outcome, is the earnings announcement is not impressive and the short-term investors in the stock for a quick buck bail immediately, along with long-term investors who are devastated by the debacle. The third outcome is the earnings and products released are colossal hits out of the ballpark, propelling the stock even higher, and the rarest of outcomes.
Let's review Ford's current stock action and investor activity to determine if Ford may fit into this scenario. First, is Ford's stock running up significant gains into earnings based on positive news hype? In a word, yes. Ford recently touched a new 52-week high of over $17 per share and has risen over 30% in the last quarter, going from approximately $13.50 to $16.97 a share as of Monday. Please review the following charts displaying these statistics:
Slowing global growth
Recent reports from the IMF have global growth beginning to fizzle out. The U.S. GDP for the upcoming quarter is estimated to come in at less than 1%. These are important markets for Ford. There are two major components of the earnings call. First is the historical information regarding how the company did during the previous quarter. On 4/24/2013, Ford reported 1st quarter 2013 earnings of $0.41 per share. This result beat the $0.37 consensus of the 15 analysts covering the company and beat last year's 1st quarter results by 5.13%. The next earnings announcement is expected on 07/24/2013. The consensus of the 18 analysts covering Ford for Q2 2013 is a per share value of $0.37.
The second and most important piece of information, as far as I'm concerned, is the guidance regarding future results. This is where I believe the company may fall short of expectations. With China and global growth slowing, the Eurozone still in recovery mode and the U.S. housing market beginning to show signs of weakness, I don't see Ford sticking its neck out too far regarding forward guidance. In actuality, EPS is already projected to moderate in the upcoming quarters. See chart below.
The contrarian mindset
"Whenever you find yourself on the side of the majority, it's time to pause and reflect." - Mark Twain
What a great quote from Twain. Let's reflect. A contrarian is one who attempts to profit by investing against the grain, to go against the crowd, because the crowd is usually wrong and always late. A contrarian believes that certain crowd behavior among investors can lead to exploitable opportunities. Pervasive optimism about a stock or sector can drive the price so high that it exaggerates the investment's merits and its future prospects. Identifying and seizing on these disconnects is a well-known investing tactic. I believe Ford's stocks may present such an opportunity. I looked back through the recent articles written on Ford by my fellow authors. A large majority are extremely bullish regarding the stock. This is a red flag for me. I don't like to run with the herd.
Ford's valuation seems rich by historical standards
Ford is currently trading at a much higher valuation than its historical norm due to the recent run up in the stock. Nevertheless, the fundamentals are basically in line with the industry averages.
Key fundamental ratios
Ford's PE ratio is in-line with the Auto & Truck Manufacturers industry average and implies that investors do not see anything special about this company's prospects. The one aspect that sticks out like a sore thumb is the price to tangible book ratio of 3.8.
Profit margins are basically in-line with peers and industry averages, although gross margins continue to come in below industry and peer averages.
No open market insider buys in last 12 months
The chart below shows insider activity for the past year regarding Ford's stock. According to Scottrade's Ford insider information page, no insider buys have occurred in the last twelve months. This seems unusual to me. Insiders are the people with the best information regarding the performance of the company. If Ford was on the precipice of greatness, I would expect to see some insider buys. Insiders sell for many reasons, yet only buy in the open market for one; they know the stock is undervalued. See chart below proved by Scottrade regarding insider activity over the last twelve months.
I think Ford is a great company and will be successful in the long run. The issue is I feel the stock has gotten ahead of itself prior to the upcoming quarter. I posit it will be a buy the rumor sell the news type event. You may want to consider taking profits prior to the earnings release. Stocks never go up in a straight line. Furthermore, I have seen this movie before regarding Ford.