2 Major Reasons Why Buying Ford And GM Makes Sense Now

 |  Includes: F, GM
by: Hawkinvest

The recent market correction has taken the major market averages down by about 10% below recent highs. The situation in Europe is very serious and amazingly it seems to have no end in sight. It's tough to remain invested in the market because the direction of individual stocks now appears to be more controlled by headlines from Europe and Washington, rather than by company-specific news. It is very frustrating to buy a stock that is clearly undervalued, only to see it go down or stay flat due to macro issues beyond your control. The auto sector is one example, the industry is seeing a solid rebound in sales in North America, and other areas, yet the stocks have not reflected the improving results. Since both Ford (NYSE:F) and General Motors (NYSE:GM) have significant operations in Europe, it has caused some investor concern. However, the shares of these companies have been relatively strong in recent days considering the fears in the market. The fact that GM shares have remained above $20, and Ford above $10, even on days when very bad economic news was causing markets to drop over 2%, could be a sign that the stocks are at rock-bottom valuation levels. When stocks show strength in the face of bad news, it often indicates that the shares have limited downside and could be poised to move higher. Both Ford and GM shares have shown relative strength, and while some additional weakness is possible, there is a good chance that investors who buy now with a longer-term view, are likely to see gains. Here are a couple of major positives for investors to focus on:

1) Both GM and Ford have a large number of new models coming out in 2013, which will help maintain the uptrend in sales. A recent Barron's article summarizes the positive aspects of the next-generation models from Detroit:

"Citigroup analyst Itay Michaeli recently took a "field trip" to Detroit to meet with executives and check out new models. Michaeli was impressed with General Motors' next-generation full-size trucks and said "Ford's core product strategy remains intact."

2) In another sign that the U.S. automaker stocks are deeply undervalued, it was recently disclosed that Warren Buffett's Berkshire Hathaway (BRK-B) investment company purchased about 10 million shares of General Motors. Mr. Buffett has a knack at buying solid companies when investors are selling their shares at bargain prices. He knows that in most cases, more sensible valuation will come in the future, which can lead to huge gains for him and his shareholders.

General Motors, Inc. has many new products and redesigns planned for 2013 and 2014, from the 2013 Cadillac SRX, to an all-new Corvette in 2014, the 2013 Chevy Cruze, and an all-new Suburban and Tahoe for 2014, just to name a few. GM did accept bailout funds and this resulted in the government owning a significant stake in the automaker. This continues to pose an overhang on the shares because the stake will eventually be sold. Mitt Romney recently stated that President Obama might be holding off on the sale of shares to avoid what would be a roughly $16 billion loss before the Presidential elections in November. Either way, there is a good chance that no matter who wins, the stake will be sold after November and that could take the stigma and overhang off of this stock. The shares now trade for just about 6 times earnings which are likely to rise in the long-run. Investors should consider a partial buy in GM now and additional buys if the sale of the government owned shares causes a dip in the stock price at some point in the future.

Here are some key points for GM:
Current share price: $21.91
The 52 week range is $19.00 to $32.08
Earnings estimates for 2012: $3.51 per share
Earnings estimates for 2013: $4.58 per share
Annual dividend: None

Ford Motor Company is planning to launch a number of redesigned models for 2013, including the Ford Police Interceptor, an all-new Ford Escape which features high fuel-efficiency, and the ever-popular Ford F-150 pickup, just to name a few. The Ford Focus is already one of the most popular cars in the world thanks to an appelaling design, affordability and fuel-efficiency. Ford also owns the Lincoln brand which will introduce the 2013 MKT model soon. These new designs will help the company maintain the positive sales momentum it has been experiencing. Ford is seeing other positive developments this year with an improved credit rating, and the initiation of a 20 cent per share annual dividend. Ford also benefits from strong management and the fact that it did not receive government bailout funds. With the shares trading for about 6 times earnings, and paying investors a dividend, it makes sense to consider this stock at these levels.

Here are some key points for F:
Current share price: $10.59
The 52 week range is $9.05 to $14.22
Earnings estimates for 2012: $1.49 per share
Earnings estimates for 2013: $1.73 per share
Annual dividend: 20 cents per share which yields about 2%

Data is sourced from Yahoo Finance. No guarantees or representations are made. Hawkinvest is not a registered investment advisor and does not provide specific investment advice. The information is for informational purposes only. You should always consult a financial advisor.

Disclosure: I am long F.