It's time to exit short positions in Toyota Motors (NYSE: TM), in my opinion, as I view the trade played out. As a matter of fact, we hit our target on the dot at $71 on February 4th, so strict followers of our view would have closed out for an 11% six day gain.
In the obscene hours of the early morning on January 28, before the market open, we suggested investors consider shorting the shares of Toyota Motors (NYSE: TM) or combining a short sale of Toyota with a purchase of Ford (NYSE: F) or Honda Motors (NYSE: HMC). Well, if loyal readers have not done so already, considering the stock touched down on our target, there's increased risk to the trade now, which we view played out at this point.
Back in that January report, we gave you a back-of-the-envelope valuation estimate that resulted in a price target range of $74 to $68 a share (remember we were aiming for price decline, not rise). At the time, Toyota shares were trading at $79.77, and were already down significantly from their January 19 peak of $91.78 for the year-to-date period. Still, we felt confident the damage was yet far from finished, and found basis for a short call.
We are glad to report that between then and now, the shares dropped significantly further, to trough closing day price points of $71.78 and $71.55. That's pretty darn close to the middle of our target range, with the bulls eye on $71. Thus, investors who shorted the stock at $79.77 could have earned 7.2% to the top of our target range at $74, and in a very short holding span. So the annualized gain would therefore be astounding, but it would be silly to assume we could earn this kind of gain through a full year span... or would it? "The Greek's" stock picking track record as an analyst at Standard & Poor's was pretty darn impressive (+23% ave. annual over 5 years - 26% over 3 years - 21% in the half year before leaving - top Strong Buy Stock Picker among 60 domestic analysts in house through 4 years).
I'm thrilled to report that it looks like I have not lost my mojo in the years since. You'll recall my savvy investment idea here some years back, which called for a short of Pilgrim's Pride shares, a company that later went bankrupt (if I recall correctly, from a low $20s price point). And of course, I was the one writing about the short opportunity in the mortgage related financial sector, which included many names that no longer exist now and banks that dissolved; and let's not forget my idea to short housing stocks. Yet, as a stock analyst, my prowess, and I can say that humbly because the numbers confirm it, was in "buy" recommendations. So I'm glad to have rounded out my skills to include the "sell" call. As an independent analyst, there's clearly more opportunity to do that.
"The Greek" picked the exact price point Toyota would hit on the downside.
Hold your tongue before questioning whether I still have it, because guess what the intraday low was for TM shares during the span between the initial sharing of our idea and now. Yes, TM shares hit our target center on the dot; we were spot on! Toyota's shares touched $71 exactly during the day on February 4th, which means that investors who followed my idea to the letter, closed their investment at the most profit-optimal time. As a result, they would have earned 11% in just six business days.
With regard to the pair trade, the other side of the strategy would have made a difference. However, the difference between cost or greater gain was decided by which automaker you chose to pair Toyota up with. From the close on January 27 to the close on February 4, Ford shares lost 4.2% while Honda Motors' shares gained 1.9%. Thus the total return for the pair trade, before trading costs, would have been either +6.8% or +12.9%.
The reason Ford would have cost us money during that span was because the overall market declined, basically spoiling our short slightly. The purpose of the pairing was to weed out macro market noise while also taking advantage of market share trade-off potential. However, when the market moves with the (let's call it) point investment, then we run the risk that the (let's call him shooting guard) moves in the same direction. If the market rose, we would have effectively weeded out the noise and hedged our short in TM. Honda still worked in our favor thanks to some strong company specific news relevant to the time period. The market, as estimated by the SPDRs, shed 3.1% in those six days, so if you used the SPDRs (NYSE: SPY) on the long side, you gave up hope for gain on market share trade-off (with competitor Ford or Honda) and also cost the trade money.
Several business days ago, we refrained from writing this note on the basis of two catalysts that remained capable of impacting TM shares in the shorts' favor. The Congressional hearing that brought the company's President, Akio Toyoda, to the United States to defend his company and his name, looked to us like it might get a little ugly, especially given Mr. Toyoda had no representation on the other side of the table (except perhaps the Republican from Alabama).
Secondly, we knew Toyota's February motor vehicle sales would reflect the market share loss in January, at minimum. We fully expected Ford to gain more share, and Ford's stock actually closed at a point that would have earned us a profit on our pare trade Tuesday. Still, the market had pretty much expected the news, and as we expected (though were concerned about), Toyota's stock was not damaged Tuesday.
Basically, the significant risks that stood counter to our intention to formally nullify the short call have effectively passed. Note that a few business days ago, we effectively stated at the blog that we would close the positions at that time, while we warned that two events were imminent that might threaten TM some more. Now that those events have both passed, and especially given TM's price movement Tuesday (1.06%) in the face of a monthly motor vehicle sale decline, we see no sensible reason to continue looking for value destruction in TM.
Disclosure: No Positions