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Summary

  • Ford’s recent surge higher was unjustified.
  • Ford's investment in the future offers a great long-term buying opportunity.
  • Ford's stock is fundamentally undervalued.
  • The time to buy Ford is fast approaching.

I recently wrote an article advising investors not to buy into the rally in Ford (NYSE:F) based on a March sales beat. Since that time the stock has retraced approximately half that gain. I have received numerous requests from readers as to when I would buy Ford. I believe a buy signal for the stock may be fast approaching. The company is fundamentally undervalued and making all the right moves for future growth. In the following sections I will lay out my strategy for starting a position in the stock.

Ford's recent surge higher was unjustified

Ford's stock soared recently on a March sales report beat. The stock is now sinking rapidly as the unwitting buyers sell out and move on. It is amazing to me the amount of people out there who buy first and ask questions later. The news of a March sales beat sounded great on the surface yet was no reason for the stock to rise so precipitously. If anyone had taken the time to do just a small amount of due diligence they would have realized it was simply weather-induced delayed sales from February.

(click to enlarge)

(Chart provided by Finviz.com)

Nonetheless, it could have been much worse. If Ford had not exceeded March sales and merely met expectations there could have been a major sell off in the stock. Savvy investors were expecting a March sales beat due to many sales being delayed in February. Extreme weather events caused many car buyers to put off their automotive purchases in January and February.

Ford is investing in the future and offers a great long-term investment

Ford's expects to introduce a record number of new products this year. The launch of new products will impact the bottom line in 2014. Even so, this may be the primer for increased revenues and wider margins for 2015.

Ford is greatly increasing capacity in China as we speak. Ford China recently reported record monthly sales of 103,815 vehicles, a 28 percent increase over March 2013. This is huge news as the company crossed the 100,000 monthly sales mark for the first time ever. First quarter sales for Ford China were up by 45% year-over-year with 271,321 vehicles sold compared to 186,596 during the same period last year.

Chairman and CEO of Ford China John Lawler stated,

"We're pleased that China's car buyers continue to choose Ford. Our strong sales momentum demonstrates the success of our accelerated China growth plan and puts Ford in a great position as we get ready to showcase our full product lineup at the Beijing Auto Show."

Ford's management is focused on future growth. The success in China will be a significant factor in the company's success. The fact the company is increasing capacity in China will underpin sales in the region. I posit the Chinese will appreciate the fact Ford is building the vehicles locally in China.

Ford's stock is fundamentally undervalued

Ford's stock is currently undervalued based on several key statistics.

(Table provided by Yahoo.com)

The two key indicators I review first to determine if a stock is undervalued are the PEG and forward P/E ratios. Currently, Ford's are 1.05 ad 8.32, respectively. The stock is currently trading at a discount both on a relative and historical basis. Even so, I would hold off on starting a position due to the fact I see a better entry point materializing in the near future.

The time to buy Ford is fast approaching

One key factor that determines your return on a stock is your entry point. Many people do not realize this is so important. For example, if a stock drops 50% from $20 to $10, it will take a 100% gain from $10 to $20 just to break even. This is why it is always prudent to take your time building a full position in a stock.

(click to enlarge)

(Chart provided by CNBC.com)

I am bullish on Ford for the long term, yet believe the stock has another 4% to 5% drop in store prior to finding a bottom. Currently, the stock is trading about 5% above the 50 Day SMA. I posit the stock will test this level in the near term. If the stock bounces off support at the 50 day this will be the time to buy.

Downside Risks

There are multiple downside risks for Ford going forward. Reports that China's growth is fading could be a major factor. Sales of the new models will need to be successful. The US and European economic recoveries must stay on track.

Conclusion

Ford is investing in its future. The increase in the company's capital spending plans for mid-decade from $6 billion to $7.5 billion should improve future sales opportunities.

Additionally, Ford's recent comments about potential special dividend payments and share repurchases bode well for the stock. Finally, the financial services division is expected to remain profitable and contributing positively to the bottom line.

Taking all this into consideration, I believe Ford will be successful in the company's endeavors for the long haul. Nonetheless, wait for the stock to test and confirm support at the 50 day SMA prior to starting a position. Even then, I would layer in to the position over time. With earnings just around the corner, another buying opportunity may arise.

Source: Ford: Vastly Undervalued, Yet Wait For This Signal To Buy