In spite of a major 277 point rally in the Dow Index, auto stocks like Ford (F) and General Motors (GM) dropped in value. The market rally on Friday was sparked by news that major European leaders had come to some agreements that would help to stem the ongoing crisis. The market reaction seemed overly optimistic because Spanish bond yields are still around 6.5%, which is an unsustainable level. Much of the rally could be attributed to short-covering rather than long-term investors getting into the market. This means the gains might not last, especially since earnings season starts in about one week. A number of companies have started to warn that earnings are coming in weaker than expected. That could spell trouble for the stock market in the coming weeks.
Ford recently warned that international operations would lose almost $600 million due to weakness in Europe, South America and other areas. This news dragged down Ford shares which now trade for just about 50 cents above the 52-week low. GM shares dropped to about $19.24 which is just barely above the 52-week low of $19, before recovering slightly. The downtrend in these auto stocks doesn't appear to be over and things could get worse before they get better for shareholders. With both stocks just one bad market day away from making a new 52-week low, chances are strong that fresh lows could be coming soon. Both companies have benefited from strong auto sales in North America, but economic data in the United States has started to come in weaker which is why the second half of 2012, could be tough on the sector.
Another new concern is that the economy in China appears to be deteriorating much more rapidly than expected. Specialty shoe and apparel maker Nike, Inc. (NKE) recently announced earnings that missed estimates and the stock fell about 10%. Nike said that sales in China and Europe were weakening. A slowing economy in China could add to the macro issues and bring additional pressure to bear on the global economy in coming months. It could also create company specific problems for General Motors because it has major operations and revenues coming from China. With electricity consumption, rail freight traffic and other indicators heading down in China, this could become another challenge for the automakers in the coming months.
With Europe weak and getting weaker, China and the U.S. slowing, and with the auto stocks within striking distance of making new 52-week lows, it appears that the bottom is probably not in for these stocks. There also appear to be no reason to rush in and buy now since economic visibility remains low. It's easy to make a case that Ford and GM shares are fundamentally undervalued for longer term investors, but the downtrend in the stock and the macro-economic issues are likely to make these shares even more undervalued. The best strategy could be to wait for a capitulation day whereby the stocks fall sharply on high volume before considering a buy. These stocks need to show some signs of strength before investors should consider committing any major new investment capital. When these stocks and the global economy do show signs of hitting rock-bottom, both GM and Ford shares could be poised for major gains for investors willing to hold for a couple years into the next economic up-cycle. That's why it's worth watching these two stocks closely in the coming months.
Key Data Points For General Motors From Yahoo Finance:
- Current price: $19.70
- 52-Week Range: $19 to $32.08
- Dividend: none
- 2012 Earnings Estimate: $3.48 per share
- 2013 Earnings Estimate: $4.49 per share
- P/E Ratio: about 6 times earnings
Key Data Points For Ford From Yahoo Finance:
- Current price: $9.59
- 52-Week Range: $9.05 to $14.22
- Dividend: 20 cents per share which yields 2%
- 2012 Earnings Estimate: $1.48 per share
- 2013 Earnings Estimate: $1.71 per share
- P/E Ratio: about 6 times earnings
Disclaimer: Data is sourced from Yahoo Finance. No guarantees or representations are made. Please consult a financial advisor before making investments.
Additional disclosure: I have a small position in Ford and GM, but will not add until these stocks show signs of bottoming out.