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Ford's (F) Q2 earnings were solid. They exceeded low expectations and bumped the bar a bit for the second half of 2011. They paid off debt another $2.3B and now carry an excess of automotive cash over automotive debt of $8B. Earnings for the last 1 1/2 years have now exceeded $3 per share, which is not bad for a company that closed at $12.94.

So why isn't the stock price reflecting the improving fundamentals?

The short answer is that the stock is retracing a longer term move from the roughly $2 March '09 average to the approximate high of $19 in January.'11. Lots of profit to be taken by the holders of the stock during this approximately 33% drop. This is technically healthy and needed to let some of the air out of the tires so that the company stays firmly grounded.

The longer answer is that the short-term traders (those with a short term time horizon) have a weak economic environment to support their bearish stance on the company. When short term traders trade a trend line (ie the correction mentioned above), they have a bias based on the short term economic backdrop. They often (correctly) trade against common wisdom with the belief that the psychology of the market patterns will hold when they are in the right macroeconomic scenario. So while F appears to be "dirt cheap" with barely over 6x P/E, the trend traders know that some investors will sell out of fear if the stock acts a certain way.

To the long term investor, this hocus pocus nonsense is much ado about nothing. In fact, serious investors use this corrective drift to either enter a new position or average into an already existing one. They don't care about whether the stock bottoms at $12.85 or $10.85, they care about investing in a $49B cap international member of an oligopoly that is currently producing things that the world NEEDS at a 6ish P/E ratio. When the "short term" economic environment changes and the economy actually grows again, then the true beauty of this gem shines bright.

The positive leverage of this investment reveals itself during strong economic times, as both earnings growth and P/E expansion will be ahead. Some companies hope for growth of earnings, some hope for P/E expansion, but few can expect both at the same time. Today's earnings are with 1) below market production trends (13mil vs 16mil avg) and 2) the average US auto reaching a record average of 11 years (last time I checked, these machines actually do wear out).

We believe that F will earn $3+ per share AND have a 10+ P/E again within 3 years (when the economic times are better). Investors have the longer term advantage as it is easier to understand value than it is to out think the collective minds of traders. Investors simply have to be patient and remember that F is truly a levered gem.

Source: Ford: Don't Let Short-Term Traders Dissuade You From This Levered Gem