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Lemonade From Lemons: Trading TM; Update

|Includes: F, Toyota Motor Corporation (TM)

I’m not currently a fan of the auto sector. From a global perspective, there’s a glut of capacity that will take some time to work off. The developed markets suffer from consumers that are still deleveraging, and excepting for when various government stimulus plans are in force, they are no hurry to rush to visit dealerships. The emerging markets look to be in better shape, but even there, recent tightening moves by both China and India are likely to take some of the froth off of those markets.


Having said all of that, it doesn’t mean that an unattractive sector can’t offer up some special situations, or “targets of opportunity”. Anyone who took a deep breath and pulled the trigger on F, back in March, April, or even May, is smiling today. I believe that a similar situation exits with TM.


TM recently offered just such an opportunity, as it plunged more than 20% from a close of $91.78 on Jan. 19th, to a close of $71.78 on Feb. 4th, with an intraday low of $71.00.


While there’s no question that Toyota has recently come a cropper, as their recalls mount, it seemed to me that the market may well have thrown out the baby with the bathwater, in this situation. It appears that they’re making all of the right moves to correct the situation, and repair the damage done to their reputation for reliability.


After looking at the chats, I saw that the 200 SMA was right around $80.56, which struck me as a reasonable target for a short term trade.  I typically set my charts to show the 10, 50, and 200day SMAs. Acting accordingly, I opened a position of Feb. 4th, at $71.61. So far, it appears the market is agreeing with my assessment of the situation, as TM has rebounded to close at $77.05 on Friday, the 12th.


While the easiest money may well have already been made, as far as a short term trade is concerned, there well could be more room to run on the upside. Morningstar has a 4 star rating on the stock (somewhat undervalued), and a fair value estimate of  $113.00. The stock is fairly volatile, at this point, with a 14 day ATR of $3.01, so intraday dips may well offer up opportunities to establish a position for those with a longer investing horizon.


For myself, I’ve tighten up my trailing stop, and will let the situation play out.

Disclosure: Long: TM